1. Chapter 5 Price Elasticity of Demand
Lecture Slides
Survey of Economics Irvin B. Tucker
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2. What will I learn in this chapter?
How to calculate price elasticity of demand and how this relates to total revenue (sales)
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3. What is price elasticity of demand?
The responsiveness, or sensitivity, to a change in price
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4. What is the definition of price elasticity of demand?
The ratio of the percentage change in the quantity demanded of a product to a percentage change in its price
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5. Price Elasticity of Demand
%  in Q demanded
%  in price
Ed =
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6. © 2016 south-Western, a part of Cengage Learning
Suppose a university’s enrollment drops by 20% because tuition rises by 10%, what is the price elasticity of demand?
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7. © 2016 south-Western, a part of Cengage Learning
-20%
+10%
-.20
+.10
Ed = = = 2
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8. Why is elasticity 2 in the previous example and not -2?
Because we know from the law of demand that quantity demanded and price are inversely related
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9. © 2016 south-Western, a part of Cengage Learning
Problem - When we move along a demand curve between two points, we get different answers to elasticity depending on whether we are moving up or down the demand curve
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10. How is the percent increase or decrease of two numbers calculated?
Percent change is the difference between the two numbers divided by the original number
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11. © 2016 south-Western, a part of Cengage LearningB D Q 3 5 11
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12. © 2016 south-Western, a part of Cengage Learning
If there is a decrease in quantity demanded of 5 units at point B to 3 units at point A on a demand curve, what is the percentage decrease?
(5-3)/5 = 2/5 = 40%
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13. © 2016 south-Western, a part of Cengage LearningB D Q 3 5
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14. © 2016 south-Western, a part of Cengage Learning
If there is an increase from a quantity demanded of 3 units at point A on a demand curve to 5 units, what is the percentage increase?
(5-3)/3=2/3 = 66%
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15. © 2016 south-Western, a part of Cengage Learning
Economists can solve this problem of different base points by using the midpoints as the base points of changes in prices and quantity demanded
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16. © 2016 south-Western, a part of Cengage Learning
Price elasticity equals the
 in quantity demanded
sum of quantities/2
divided by
 in price
sum of prices/2
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17. © 2016 south-Western, a part of Cengage Learning
Using the midpoints formula, how can price elasticity of demand be calculated?
Q2 – Q1
Q1 + Q2
%Q
%P
Ed = =
P2 – P1
P1 + P2
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18. © 2016 south-Western, a part of Cengage Learning
What is elastic demand?
A condition in which the percentage change in quantity demanded is greater than the percentage change in price
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19. Increase in total revenue Decrease in total revenue
Elastic Demand
Increase in total revenue
Decrease in total revenue
Price decrease
Price increase
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20. Exhibit 5-1(a) Elastic Demand (Ed > 1)40 A 30 B
Price per Ticket (dollars) 20
Demand curve 10 10 20 30 40
Quantity of Tickets per Concert (thousands) 20
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21. Why is the demand curve in the previous slide elastic?
See the price elasticity of demand calculation in the following slide:
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22. © 2016 south-Western, a part of Cengage Learning40
% change in Q =
.50 = 10 50
% change in P = =
.20
% change in Q
% change in P
.50
.20
Ed = =
Ed = 2.50, which is > 1
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23. What is inelastic demand?
The percentage change in the quantity demanded is less than the percentage change in price
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24. Inelastic Demand Decrease in total revenue Increase in total revenue
Price increase
Price decrease
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25. Exhibit 5-1(b) Inelastic Demand (Ed < 1)40 C 30
Price per Ticket (dollars) D 20
Demand curve 10 10 20 30 40
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Quantity of Tickets per Concert (thousands)

26. Why is the demand curve in the previous slide inelastic?
See the price elasticity of demand calculation in the next slide:
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27. © 2016 south-Western, a part of Cengage Learning5 45
% change in Q = =
.11 10 50
% change in P =
.20 =
% change in Q
% change in P
.11
.20
Ed = =
= 0.55, which is < 1
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28. What is a unitary elastic demand curve?
The percentage change in the quantity demanded is equal to the percentage change in price
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29. Unitary Elastic Demand No change in total revenue
Price increase
Price decrease
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30. Exhibit 5-1(c) Unitary Elastic Demand (Ed = 1)40 E 30
Price per Ticket (dollars) F 20
Demand curve 10 10 20 30 40
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Quantity of Tickets per Concert (thousands)

31. Why is the demand curve in the previous slide unitary elastic?
See the price elasticity of demand calculation in the next slide:
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32. © 2016 south-Western, a part of Cengage Learning10 50
% change in Q = =
.20 10 50
% change in P =
.20 =
% change in Q
% change in P
.20
Ed = =
Ed = 1
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33. What is a perfectly elastic demand curve?
An extreme condition in which a small percentage change in price brings about an infinite percentage change in the quantity demanded
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34. Infinite change in quantity demanded
Perfectly Elastic Demand
Infinite change in quantity demanded
Price change
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35. Price per Ticket (dollars) Quantity of Tickets per Concert (thousands)
Exhibit 5-2(a) Perfectly Elastic Demand (Ed=∞) 40 30
Demand
Price per Ticket (dollars) 20 10 10 20 30 40
Quantity of Tickets per Concert (thousands)
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36. Why is the demand curve in the previous slide perfectly elastic ?
At a price of $20, buyers will purchase an infinite quantity. But at any other price, they will purchase zero. Therefore, the change in quantity demanded is infinite and Ed =∞.
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37. What is a perfectly inelastic demand curve?
Another extreme condition in which the quantity demanded does not change as the price changes.
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38. Perfectly Inelastic Demand Zero change in quantity demanded
Price change
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39. Exhibit 5-2(b) Perfectly Inelastic Demand Ed = 040 30
Price per Ticket (dollars) 20 10 10 20 30 40
Quantity of Tickets per Concert (thousands)
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40. Why is the demand curve in the previous slide perfectly inelastic ?
Regardless of the percentage change in ticket price, buyers will purchase a quantity demanded of 20,000. Therefore, Ed =0.
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41. © 2016 south-Western, a part of Cengage Learning
5.3
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42. If a college raises tuition, what happens to total revenue?
If demand is elastic - total revenue decreases
If demand is unitary elastic – total revenue is constant
If demand is inelastic - total revenue increases
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43. © 2016 south-Western, a part of Cengage Learning
If price increases and the revenue gained is less than the revenue lost, the demand curve is price elastic > 1
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44. © 2016 south-Western, a part of Cengage Learning
If total revenue does not change when price increases, the demand curve is unitary elastic =1
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45. © 2016 south-Western, a part of Cengage Learning
If price increases and the revenue gained is greater than the revenue lost, the demand curve is price inelastic < 1
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46. Does price elasticity of demand vary along a demand curve?
Yes. The price elasticity of demand coefficient of demand applies only to a specific range of prices along the demand curve.
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47. © 2016 south-Western, a part of Cengage Learning

48. Elastic Inelastic Unitary elastic
Exhibit 5-4(a) Price Elasticity of Demand Ranges 40
(Ed
>1) 35
Elastic 30 25
Price per Ticket (dollars) 20
Inelastic
(Ed
<1) 15
Unitary elastic
(Ed
=1) 10 5
Demand 5 10 15 20 25 30 35 40 45
Quantity of Tickets per Concert (thousands) 48
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49. TR Elastic Inelastic Unitary Elastic 50 5 10 15 20 25 30 35 40 45 400
Exhibit 5-4(b) Total Revenue Curve
400
(Ed
>1)
350
Elastic
(Ed
<1)
300
Inelastic
250
Price per Ticket (thousands of dollars)
200
Unitary Elastic
(Ed
=1) TR
150
100 50 5 10 15 20 25 30 35 40 45
Quantity of Tickets per Concert (thousands) 49
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50. © 2016 south-Western, a part of Cengage Learning.5
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51. What factors influence demand elasticity?
Availability of substitutes
Share of budget on the product
Adjustment to a price change over time
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52. What do substitutes have to do with a price change?
The more substitutes a product has, the more sensitive consumers are to a price change, and the more elastic the demand curve
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53. What conclusion can we make concerning substitutes?
The price elasticity of demand is directly related to the availability of good substitutes for a product
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54. © 2016 south-Western, a part of Cengage LearningB D D
Which demand curve is for a vital medicine and which is for candy?
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55. Why does curve A represent he demand curve for medicine?
Because medicine is a necessity with few substitutes, and the price can change with little effect on the quantity demanded
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56. Why does curve B represent the demand curve for candy?
Because candy has many substitutes, a price change can bring about a big change in the quantity demanded
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57. What does the share of one’s budget have to do with a price change?
The larger the purchase is to one’s budget, the more sensitive consumers are to a price change, and the more elastic the demand curve
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58. What does time have to do with sensitivity?
The longer consumers have to adjust, the more sensitive they are to a price change, and the more elastic the demand curve
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59. © 2016 south-Western, a part of Cengage Learning
5.6
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60. What conclusion can we make?
In general, the price elasticity coefficient of demand is higher the longer a price change persists
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61. © 2016 south-Western, a part of Cengage Learning
END
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