Price Elasticity of
Demand
Elastic
Inelastic
I. Price Elasticity of Demand
A. Consumers are sensitive
to changes in price of a
product.
i. Elasticity = the extent to which
a change in price causes a
change in the quantity
demanded
Demand Elasticity
II. Price Elastic Demand:
Large change in the
quantity demanded relative
to a change in price.
ex. Car sub-woofers, luxury
autos, T-bone steak,
pedicures
A. Math: % change in quantity
demanded is more than the %
change in price
This is like a total
bummer… I just
can’t afford you
guys anymore.
Elastic Demand
SMALL CHANGE IN PRICE = LARGE CHANGE IN QUANTITY DEMANDED
B. Perfect Elastic: Any rise in price =
quantity demanded drop to 0 (horizontal
graph)
III. Price Inelastic Demand:
Small change in the quantity
demanded relative to a change
in price
ex. Insulin, gasoline,
cigarettes
A. Math: the % change in price is
more than the % change in
quantity demanded
That pretzel thinks he’s
so smart hiding in this
powerpoint. Little does
he know, his days are
numbered. My ship is
right on course for a
delicious snack
!MUUHAHAHAHAHAHA!
I HOPE MR.
MATHROLE
DOESN’T FIND
ME!
INELASTIC DEMAND
CHANGES IN PRICE = NOT LARGE EFFECT QUANTITY DEMANDED
B. Perfect Inelastic: Change in price has no affect
on quantity demanded (vertical graph)
What affects elasticity of Demand?
IV. Effects on Price Elasticity (Determinants)
A. Number of substitutes : larger number of
substitutes, greater elasticity of demand
B. Proportion of Income: larger the cost, greater
elasticity of demand
C. Luxuries: non-necessities are more elastic
D. Time: elasticity increases over time
**if the purchase can be put off, demand is
elastic (gives the consumer time to find
substitutes)
V. Unitary Price Elasticity: A change in price
causes a proportional change in quantity
demanded.
ex. Starbucks latte’s price drops by 50%,
resulting in a 50% increase in quantity
demanded (sales).
A. Math: % Change in Price = % Change in
Quantity Demanded.
UNITARY ELASTIC
% CHANGE IN PRICE = % CHANGE IN QUANTITY DEMANDED
VI. Price Elasticity of Demand
Calculation (E)
A. E (price elasticity) = %ΔQ / %ΔP
%ΔQ Percentage Change in quantity demanded
E=
--------------------------------------------------------------------
%ΔP Percentage change in price
B. %Δ = Percentage Change
New number -- Original Number
%Δ =
-----------------------------------------------------
Original Number
*** Disregard any negative signs just use positive numbers**
So how do we do it?
• Think Pizza
• Pizza slice at Mountain Mike’s decreases from
$4 to $3 and with this change, quantity
demanded goes from 10 to 20 slices
STEP 1 : Calculate Percentage Change in
Quantity %ΔQ
New quantity ( 20 ) - Original quantity ( 10 )
10
------------------------------------ = ------- =
original quantity (10 )
10
1.0 or 100%
STEP 2 : Calculate Percentage
Change of Price
%ΔP
[New price ($3 ) - Original price ($4 )]
1
------------------------------------ = ------- = .25 or 25%
4
original price ( $4 )
STEP 3
%ΔQ Percentage Change in quantity demanded
E=
-------------------------------------------------------------------%ΔP Percentage change in price
Price Elasticity
=
1.0 or 100%
------------------- = 4
.25 or 25%
Scores more than 1 = Elastic Demand (price greatly affects
quantity demanded)
Scores less than 1 = Inelastic Demand (price has little effect on
quantity demanded)
ELASTIC OR INELASTIC?
• So is TAVO’s ELASTIC or INELASTIC?
TAVO’s is hella ELASTIC
for sure bro!....
VII. Changing Elasticity on
Demand Curve
A. Elasticity is
greatest at higher
prices and lowest
at low prices
B. Midpoint in Curve
= unit elastic
C. Consumers react
to % changes in
price more at high
prices
VIII. Who Cares about Elasticity
A. Predicting Effects of Price Changes
i.
Producers like to know if how their total
revenue will be affected by changes in price.
ii. Elasticity calculations help producers predict
price effects on quantity demanded (aka
elasticity).
Example: If In and Out Burger can predict that
they will sell 30% more burgers if they lower
the price by 15% they can make wise
decisions about pricing and possibly in
crease total revenue (sales).
B. Total Revenue:
(TR) = Price (P) x Quantity Demanded (Q)
TR = PxQ
i.
Producers seek to measure price effects on
quantity demanded (aka elasticity) by
calculating TR
ii. TR increases in elastic sections of the
demand curve
iii. TR max at midpoint or unit elastic section
iv. TR falls in inelastic sections of the curve
Another way to look at it…
Price Change
Price Increase
Price Increase
Price Decrease
Price Decrease
Elasticity
Change in Total
Revenue
Inelastic
Total Revenue
Increases
Elastic
Total Revenue
Decreases
Inelastic
Total Revenue
Decreases
Elastic
Total Revenue
Increases
Demand for Jeans at Mathrole’s Disco Demin
Emporium
Price
Quantity
Total Revenue (PxQ)
100
5
500
80
10
800
60
15
900
40
20
800
20
25
500
Elasticity = 5
Elasticity = 1
Elasticity = .5
Think about it!
• Would you be more excited about a
20% off sale if the price of the good was
$100 or if the price of the good was
$30? Both represent a 20% price
change. However, one price change
has a much greater affect on how much
of people will buy.