Price Elasticity of

Demand
 Price Elasticity of
Demand
• Calculating Price Elasticity of
Demand
• Elasticity and Straight-line
Demand Curves
• Elasticity and Total Expenditure
• Categorizing Goods by Elasticity
• Determinants of Elasticity
 Price Elasticity of Demand

• The sensitivity of quantity

demanded to price
• The percentage change in
quantity demanded caused
by a 1 percent change in
price % Q D
ED 
% P
 Price Elasticity of Demand

• A percentage change is
usually defined as the
change in a variable
divided by the starting, or
base, value
• The base value is always
midway between the initial
value and the new value
 Price Elasticity of Demand

Price
per
Laptop
D
$3,500
C
3,000

2,500

2,000
B
1,500
A
1,000

100,000 200,000 300,000 400,000 500,000 600,000 Quantity

of Laptops
 Elasticity and Straight-Line
Demand Curves

• Elasticity of demand varies

along a straight-line
demand curve.
• More specifically, demand
becomes more elastic as we
move upward and leftward.
Elasticity and Straight-Line
Demand Curves

Price Since equal dollar

increases (vertical arrows)
are smaller and smaller
percentage increases . . .
. . . and since equal quantity
decreases (horizontal arrows)
3 are larger and larger
percentage decreases . . .
2

. . . demand becomes
more and more elastic
as we move leftward and
upward along a straight
line demand curve. D

Quantity
 Inelastic Demand

Inelastic Demand
A price elasticity of
demand between 0 and
-1
 Perfectly Inelastic
Demand
Perfectly Inelastic
Demand
A price elasticity of
demand equal to 0
 Perfectly Elastic
Demand
Elastic Demand
A price elasticity of
demand less than -1
 Extreme Cases of
Demand
(a) (b)
Price Price
per per
Unit Unit
D

$4 $4
Perfectly Elastic
3 3 Demand
Perfectly Inelastic
Demand
2 2 D

1 1

20 40 60 80 100 20 40 60 80 100
Quantity Quan
 Perfectly Elastic
Demand
Perfectly (Infinitely)
Elastic Demand
A price elasticity of
demand approaching
minus infinity
 Unitary Elastic
Demand
Unitary Elastic
Demand
A price elasticity of
demand equal to -1
 Elasticity and Total
Expenditure
• If demand is price inelastic,
then total expenditure moves in
the same direction as price.
• If demand is elastic, total
spending moves in the opposite
direction from price.
• If demand is unitary elastic,
total expenditure remains the
same as price changes.
 Effects of Price Changes on
Expenditure

Where Demand is: A price increase will: A price decrease will:

inelastic (|ED| < 1) increase expenditure decrease expenditure

unitary elastic (|ED| = 1) cause no change in cause no change in
expenditure expenditure
elastic (|ED| > 1) decrease expenditure increase expenditure
 Effects of Price Changes on
Expenditure

At any point on a demand curve,

buyers’ total expenditures is the area of
a rectangle with width equal to
quantity demanded and height equal to
price.
 Elasticity and Total
Expenditure
Price
per
Laptop
$3,500

3,000

2,500

2,000
B
1,500
A
1,000
D
500

100,000 200,000 300,000 400,000 500,000 600,000 Quantity

of Laptops
 Determinants of
Elasticity
Short-run Elasticity
An elasticity measured
just a short time after
a price change
 Determinants of
Elasticity
Specific Brands Narrow Categories Broad Categories

Tide Detergent –2.79 Transatlantic Air Travel –1.30 Recreation –1.09

Tourism in Thailand –1.20
Pepsi –2.08 Ground Beef –1.02 Clothing –0.89
Coke –1.71 Pork –0.78 Food –0.67
Milk –0.54 Imports –0.58
Cigarettes –0.45 Transportation –0.56
Electricity –0.40 to –0.50
Beer –0.26
Eggs –0.26
Gasoline –0.20
Oil –0.15
 Long-run Elasticity

Long-run Elasticity
An elasticity measured
a year or more after a
price change
 Short-run and Long-run
Elasticity

Short Run (a few months of less) Long Run (a year or more)

Use public transit more often Buy a more fuel-efficient car

Arrange a car pool Move closer to your job
Get a tune-up Switch to a job closer to home
Drive more slowly on the highway Move to a city where less driving is required
Eliminate unnecessary trips (use mail order
and the Internet instead of driving to stores;
locate goods by phone instead of driving
around; shop for food less often and buy
more each time)
It there are two cars, use the more
fuel-efficient one
 Short-run and Long-run
Elasticity

• Easier to find substitutes for an

item in the long run than in the
short run
• Thus, demand is more elastic in
the long run than in the short
run
• The more of their total budgets
households spend on an item,
the more elastic the demand for
 Price Elasticity of
Demand
• The more elastic the demand
curve, the more of an excise
tax paid by sellers
• The more inelastic the
demand curve, the more of
the tax paid by buyers
 Price Elasticity of
Demand
(a) (b)
Price Price
per per
Ticket Ticket
D S'
S'
S
$830 S
B

730 $730 D
A B A

Tickets Tickets
11.3(Millions per Year) 7.0 11.3(Millions per Year)
 Other Demand
Elasticities

•Income Elasticity of
Demand
•Cross-Price Elasticity
of Demand
Income Elasticity of Demand

Income Elasticity of
Demand
The percentage change
demanded caused by a 1-
%  Q D
percent 
E Ichange in income
%I
 Income Elasticity of
Demand
Economic Necessity
A good with an income elasticity
of demand between 0 and 1

Economic Luxury
A good with an income elasticity
of demand greater than 1
 Cross-Price Elasticity of
Demand

Cross-Price Elasticity of
Demand
The percentage change in
the the quantity
demanded of one good
caused by a 1-percent