Transcript Click to edit Master title style - McGraw-Hill

The law of demand says:
An increase in price causes a decrease in
quantity demanded (and vice-versa)
 But how much does quantity demanded
change in response to a change in price?
 Elasticity gives us a measure of
responsiveness


© 2013 McGraw-Hill Ryerson Ltd.
Chapter 4, LO1
1


When QD responds strongly to a change in P,
demand is elastic
When QD responds weakly to a change in P,
demand is inelastic
Ed = percentage change in quantity demanded of product X
percentage change in price of product X
© 2013 McGraw-Hill Ryerson Ltd.
Chapter 4, LO1
2
 If the quantity demanded increased from 4 to 5 units
the percentage change would be:
 %ΔQd = ΔQd/Q0 = ¼ x 100 = 25%
 If the quantity demanded dropped from 5 to 4, the
percentage change would be:
 %ΔQ = ΔQd/Q0 = 1/5 x 100 = 20%
 Which percentage change in Qd do we use? 25% or
20%?
 To avoid confusion about start and end point we use
average change in Qd and the average change in P.
© 2013 McGraw-Hill Ryerson Ltd.
Chapter 4, LO1
3
change in quantity change in price
Ed 

100
sum of quantities/ 2 sum of prices/ 2
If the quantity demanded increased from 4 to 5
units the percentage change would be:
Q
P
1
1
Ed 



1
(Q0  Q1 ) / 2 ( P0  P1 ) / 2 (4  5) / 2 (4  5) / 2
© 2013 McGraw-Hill Ryerson Ltd.
Chapter 4, LO1
4

Price elasticity of demand:
 Use percentages
▪ Unit free measure
▪ Compare responsiveness across products
 Eliminate the minus sign
▪ Easier to compare elasticities
© 2013 McGraw-Hill Ryerson Ltd.
Chapter 4, LO1
5




Ed > 1 demand is elastic
Ed = 1 demand is unit elastic
Ed < 1 demand is inelastic
Extreme cases
 Perfectly inelastic
 Perfectly elastic
LO1
© 2013 McGraw-Hill Ryerson Ltd.
Chapter 4, LO1
6
P
D1
Perfectly
inelastic
demand
(Ed = 0)
0
Perfectly inelastic demand
© 2013 McGraw-Hill Ryerson Ltd.
Chapter 4, LO1
7
P
D2
Perfectly elastic
demand
(Ed = ∞)
0
Perfectly elastic demand
© 2013 McGraw-Hill Ryerson Ltd.
Chapter 4, LO1
8