Elasticity:

% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑

Price Elasticity of Demand =
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒

How to calculate % change

Income 5000 taka, now 6000 taka. What is the % change?
𝑁𝑒𝑤−𝑂𝑙𝑑
Normal method= 𝑥 100
𝑂𝑙𝑑

Answer the following questions on the basis of the following table? Explain the
value of the price elasticity of demand.
Point Price Quantity Demand
A 10 200
B 15 150
a) Calculate price elasticity of Demand using normal method when price moves
from point A to Point B?
b) Calculate price elasticity of Demand using normal method when price moves
from point B to Point A?
c) Calculate price elasticity of Demand using Mid-point method when price moves
from point A to Point B?
d) Calculate price elasticity of Demand using Mid-point method when price moves
from point B to Point A?
150−200
𝑥100
200
a) Price elasticity demand A to B = 15−10 = - 0.5
10
𝑥100

200−150
150
𝑥100
b) Price elasticity demand B to A = 10−15 =-1
15
𝑥100

To avoid this problem, we can use mid-point method

𝑁𝑒𝑤−𝑂𝑙𝑑
Mid-point method= 𝑥 100
𝑀𝑖𝑑−𝑝𝑜𝑖𝑛𝑡
150−200
175
𝑥100
c) Price elasticity demand A to B = 15−10 = - 0.71
𝑥100
12.5
 200−150
175
𝑥100
d) Price elasticity demand B to A = 10−15 = - 0.71
12.5
𝑥100

So, the benefit of mid-point is, whatever the direction you are taking, in both cases
it will give us the same result.
Determinants of Price elasticity of demand
1. Availability of close substitute
Wheat price increase, Qd wheat decrease a lot because of close substitute.
Egg Price increase, Qd will decrease slightly, its inelastic
N.B: More the substitute good, more elastic
2. Necessity VS Luxury
Medicine Price, Qd decrease slightly, its inelastic
Car price, Qd decrease a lot, its elastic
N.B: necessary good will be more inelastic and luxury good will be elastic
3. Definition of the market
Broadly or narrowly
Food- broadly, banana-narrowly
More inelastic if we define the market broadly and more elastic if the define the
market narrowly.
4. Time horizon
Short run or long run
Oil price, bus ticket price increase,
In short run, the good will be inelastic but in the long people adjust and it become
elastic.
Variety of Price elasticity:
1. Perfectly inelastic demand
2. inelastic demand
3. Unit elastic demand
4. elastic demand
5. Perfectly elastic demand
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 10%
Price Elasticity of Demand = =10% = 1= Unit elastic
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒

% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 9%

Price Elasticity of Demand = =10% = <1= Inelastic
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒

% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 11%

Price Elasticity of Demand = = =>1= Elastic
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒 10%

% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 0%

Price Elasticity of Demand = =10% =0= Perfectly Inelastic
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒

% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 10%

Price Elasticity of Demand = = 0% = infinity = Perfectly elastic
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒
demand
Total revenue and Price elasticity of demand:
TR= P xQ

Recap:
1.What is Price elasticity of demand?
2. What are the determinants of price elasticity of demand?
3. Calculation of Price elasticity of demand
4. Variety of elasticity of demand
5. Total revenue and price elasticity of demand
Income elasticity of demand:
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
Income Elasticity of Demand = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐼𝑛𝑐𝑜𝑚𝑒

If the value of income elasticity of demand is positive, the good will be normal and if the value is
negative the good will be inferior.

Cross Price elasticity of demand:

% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑔𝑜𝑜𝑑 𝐴
Cross Price Elasticity of Demand = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝐺𝑜𝑜𝑑 𝐵

Substitute good: Coke Price Increase, pepsi Qd increase= + relationship

Complementary good: Tea Price increase and sugar Qd decrease= - relationship

The cross price elasticity of demand for good X and Y is 0.37, the good is

Price elasticity of Supply:

% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑
Price elasticity of supply = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒

Determinants of Price elasticity of supply:

1. Ability of sellers to change the amount of the good they produce.
Beach-front land is inelastic.
Books, cars, or manufactured goods are elastic.
2. Time period.
Supply is more elastic in the long run.