1. Price Elasticity of Demand
By Crystal Wang
Gregory Chang
All: Price Elasticity of Demand
Crystal: By Crystal Wang
Gregory: Gregory Chang

2. Definition How responsive demand is to a change in price
% change in quantity demanded
% change in price
Answer>1 means price elastic
Answer<1 means price inelastic
Crystal: Price Elasticity of Demand is a measure of how sensitive demand is to price. It is calculated by percentage change in quantity divided by the percentage change in price. When you have a answer that is more than one, that means the demand is very sensitive to price and a small change in price will lead to a big change in demand. The demand is said to be PRICE ELASTIC. On the other hand, when you have a answer that is less than one, then the demand is PRICE INELASTIC.

3. Diagram Price Quantity S Equilibrium D
Gregory: This is a supply and demand graph. And, this is what we call the equilibrium (point). When this is applied to the concept of price elasticity of demand, the angle of the curve shift.

4. Diagram Price Quantity PRICE ELASTIC S2 D S1 Q1 P1 Q2 P2
Gregory: As you can clearly see in this diagram, the demand is price elastic. This is because when price increased from P1 to P2, it caused the quantity for demand to decrease by a large amount. It usually happens to non-essentials such as luxury goods.
PRICE ELASTIC

5. Diagram Price Quantity PRICE INELASTIC S1 S2 D Q1 Q2 P1 P2
Crystal: In this diagram the same fall in supply has caused price to rise from P1 to P2. However, demand has only contracted a little from Q1 to Q2. This is said to be price inelastic because a BIG change in price only lead to a small change in demand. It mostly happens to essentials such as food and water.
PRICE INELASTIC

6. Determinants Substitutes Percentage of income Necessity
Gregory: Factors which affects price elasticity of demand,
-substitutes
When consumers are able to choose between a large amount of substitutes for a particular product, then the demand for any one of them is likely to be price elastic.
Price inelastic only happens when there are few substitutes.
-percentage of income
Goods such as newspapers that don’t cost very much is likely to be price in elastic, since they only take a little bit out of one’s income.
-Necessity
Goods such as food are consider as necessity. These products are mostly price inelastic, especially there are only a few substitutes.

7. Special demand curves Price Ed=0 Quantity D P2 P1
Crystal: The rise and fall of the price causes no change in quantity demand, the demand is said to be perfectly price inelastic. Price elasticity of demand is 0.

8. Special demand curves Price Ed=∞ Quantity P1 D
Crystal: If a product is only demanded at one particular, price demand is said to be infinitely price elastic.
A small change in price will cause the quantity demand to change by an infinite amount.

9. Special demand curves Price Ed=1 Quantity D equidistance P1 Q2 Q1 P2
Gregory: When the price elasticity of demand is 1, it is also said to be of unitary elasticity. The percentage change in price of a product will cause an equal percentage change in quantity demand.