ELASTICITY

Price Elasticity of Demand Formula

• Formula for price elasticity of demand

Own price elasticity
Percentage Change in Quantity
Demanded of Product X
Ed =
Percentage Change in Price
of Product X

LO1 4-2
• Elasticity: (dQdx/dPx) (Px/Qdx)
• Qdx = 10-0.5Px
• Px is 2
• Is product X elastic?
VERY ELASTIC THE PRODUCT IF ABSOLUTE OWN PRICE
ELASTICITY IS MORE THAN 1
ELASTIC PRODUCT IF ABSOLUTE OWN PRICE
ELASTICITY IS 1

INELASTIC PRODUCT IF ABSOLUTE OWN PRICE

ELASTICITY IS LESS THAN 1
 VERY ELASTIC

WHEN PRICE INCREASES 1% THEN QUANTITY

DEMANDED DECREASES 2 %
• Suppose the demand for airline tickets from Istanbul to Vienna by
business travelers and tourists is given in the Table below:
As the price rises from 200 to 250, what is the elasticity of demand by
business travelers and by tourists?
PRICE Q DEMAND BY BUSINESS Q DEMAND BY TOURISTS
TRAVELERS
150 2100 1000
200 2000 800
250 1900 600
300 1800 400
 Price Elasticity of Demand

• Measures buyers’ responsiveness to

price changes
• Elastic demand
• Sensitive to price changes
• Large change in quantity
• Inelastic demand
• Insensitive to price changes
• Small change in quantity
LO1 4-10
 Price Elasticity of Demand Formula

• Formula for price elasticity of demand

Percentage Change in Quantity

Demanded of Product X
Ed =
Percentage Change in Price
of Product X

LO1 4-12
 elasticity
• EQdxpx= (dQdx/dPx)(Px/Qx)
• Given the demand function
Qd = 1000 – 0.5 P
find the price elasticity of demand at an
output level of 200.
 Interpretation of Elasticity of Demand

• Ed > 1 demand is elastic

• Ed = 1 demand is unit elastic
• Ed < 1 demand is inelastic
• Extreme cases
• Perfectly inelastic
• Perfectly elastic

LO1 4-18
 Extreme Cases

P D1
Perfectly
inelastic
demand
(Ed = 0)

Perfectly inelastic demand

LO1 4-19
 Extreme Cases

D2
Perfectly
elastic
demand
(Ed = ∞)

Perfectly elastic demand

LO1 4-24
 Determinants of Elasticity of Demand

• Substitutability
• More substitutes, demand is more elastic
• Proportion of Income
• Higher proportion of income, demand is more
elastic
• Luxuries vs. Necessities
• Luxury goods, demand is more elastic
• Time
• More time available, demand is more elastic
LO1 4-26
• EQdxI = (dQdx/dI) (I/Qdx)

• Example:
• Qdx = 10- 0.5 P +1.2I
• What is the income elasticity?
• When income elasticity is more than zero then we say the product is
normal good

• When income elasticity is less than zero then we say the product is inferior
good
• When income elasticity is more than zero then we say the product is
normal good
• Normal good means when income increases consumers would
increase demand of good, when income decreases consumers would
decrease demand of good.

• When income elasticity is less than zero then we say the product is
inferior good
• Inferior good means when income increases consumers would
decrease demand of good, when income decreases consumers would
increase demand of good.