Elasticity of Demand

Measures the responsiveness of demand to a change in a

Elasticity
relevant variable – such as price or income.

Measures the extent to which the quantity of a product

PED
demanded changes in response to a change in price.
Price Elasticity of Demand (PED)
What would happen to your demand if prices of these goods increased by 20%?
Price Elasticity of Demand (PED)
Calculation of PED:

% change in Quantity Demanded (Qd)

% change in Price (P)

Price Elasticity of Demand (PED)
Example: Calculate the PED for Boba Milk Tea
Price
Qd % change in Quantity Demanded (Qd)
(per cup)
$4 1000 % change in Price (P)
$5 800
Price Elasticity of Demand (PED)
How to interpret PED?
Value of
PED Interpreting The Elasticity

Price inelastic

Price elastic

Unitary price elastic

Price Elasticity of Demand (PED)
% change in Quantity Demanded (Qd)

Price (US$) % change in Price (P)

105
100
DB PEDA =

DA

900 990 1000 Qd

PEDB =
Factors affecting PED
• Elasticity of the demand is influenced by:
Price Elasticity of Demand (PED)
How do the demand curves look like when demand is:
1. Perfectly elastic

2. Perfectly inelastic

3. Unitary elastic

Give explanation!
Some Special PED Values
• Extreme cases of price elasticity of demand
• Demand totally unresponsive to price
Price (US$) D

100 Qd
Some Special PED Values
• Perfectly elastic demand
• Consumers demand an unlimited quantity of the good

Price (US$)

Qd
Some Special PED Values
• Unitary elasticity

• Relative increase in price is exactly matched by the relative fall in quantity

demanded
Explain these PEDs

PED = -0.8 When price changes by 10%, quantity demanded will change by 8%

PED = -2 When price changes by 10%, quantity demanded will change by 2%

PED = -1 When price changes by 10%, quantity demanded will change by 10%
Price Elasticity of Demand (PED)
If price increases by 10% and PED is -2
Quantity demanded will fall by 20%

If price increases by 10% and PED is -0.2

Quantity demanded will fall by 2%
 Point Elasticity of Demand
Price
10 Scenario Price Quantity

A 9 2

B 8 4

C 5.50 9
5
D 4.50 11

E 2 16

F 1 18

10 20
Quantity of Burger
Point Elasticity of Demand
Scenario Price Quantity

A 9 2 PEDB =
B 8 4

C 5.50 9

D 4.50 11

E 2 16 PEDF =

F 1 18
The Importance of Price Elasticity of Demand

Pricing strategies for producers

Price
Total
10 Scenario Price Quantity
Revenue

A 9 2

B 8 4

C 5.50 9
5
D 4.50 11

E 2 16

F 1 18

10 20
Quantity of Burger
Price

10
8
Total
6 Scenario Price Quantity
Revenue
4
A 9 2
2
B 8 4
10 20 Q of Burger
TR C 5.50 9

50 D 4.50 11
40
E 2 16
30
F 1 18
20
10

10 20 Q of Burger
PED and total expenditure/total revenue
At $10 consumers’ expenditure is $10 x 100 = $1,000 = revenue received by companies
Price (US$)

11
10
De

Di

80 95 100 Quantity