1. Price Elasticities of Demand

2. Definition:
Price elasticity of demand is a measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buyers’ plans remain the same
To determine price elasticity of demand: compare the % change in the quantity demanded with the percentage change in price

3. Percentage Price in Change
Starbucks raised the price of a latte from $3 to $5 a cup. What is the percentage change in price?
Percent change in price =
New price – Initial price
Initial Price
x 100

4. Percentage Change in Price
Starbucks cuts the price of a latte from $5 to $3 a cup. What now is the percentage change in price?
Percent change in price =
New price – Initial price
Initial Price
x 100

5. Percentage Change in Price
Elasticity compares the percentage change in the quantity demanded with the percentage change in price
Midpoint Method -- To calculate the percentage change that does not depend on the direction of the price change

6. Percentage Price in Change
Midpoint Method Calculation
Starbucks Latte price changing from $5 to $3. $5 for a new price and $3 for the initial price.
x 100
Percent change in price =
New price – Initial price
(New Price + Initial Price) ÷ 2

7. Percentage Change in Price
Average price is the same regardless of whether the price rises or falls

8. Percentage Change in Quantity Demanded
Price of a Latte rises from $3 to $5 a cup, the quantity demanded decreases from 15 cups to 5 cups an hour.
Uses the midpoint formula again
x 100
Percent change in price =
New price – Initial price
(New Price + Initial Price) ÷ 2

9. Percentage Change in Quantity Demanded
When the price of a good rises, the quantity demanded of it decreases
A positive change in price bring a negative change in the quantity demanded
When the price of a good falls, the quantity demanded of it increases
Negative change in price brings a positive change in the quantity demanded

10. Elastic and Inelastic Demand
Elastic Demand – when the percentage change in the quantity demanded exceeds the percentage change in price
Unit Elastic Demand – percentage change in the quantity demanded equals the percentage change in price
Inelastic Demand – percentage change in the quantity demanded is less than the percentage change in price

11. Elastic Demand
Perfectly Elastic Demand – an almost zero percentage change in the price brings a very large percentage change in the quantity demanded
Consumers are willing to buy any quantity of the good at a given price but none at a higher price

12. Perfectly Elastic Demand

13. Elastic Demand
A percentage change in the quantity demanded exceeds the percentage change in price

14. Unit Elastic Demand
The percentage change in the quantity demanded equals the percentage change in price

15. Inelastic Demand
Percentage change in the quantity demanded is less than the percentage change in price

16. Perfectly Inelastic Demand
Percentage change in the quantity demanded is zero for any percentage change in price

17. Influences on Price Elasticity of Demand
Two influences:
Availability of substitutes
Proportion of income spent

18. Influences on Price Elasticity of Demand
Demand for good is elastic if a substitute is easy to find
Soft drink containers
Demand for good is inelastic if a substitute is hard to find
Oil substitutes?

19. Influences on Price Elasticity of Demand
Three factors that influence the ability to find a substitute for a good:
Whether good is a luxury or a necessity
How narrowly it is defined
Amount of time available to find a substitute for it

20. Price Elasticity of Demand
The greater the proportion of income spend on a good, the greater is the impact of a rise in its price on the quantity of that good that people can afford to buy and the more elastic it is the demand for that good
Toothpaste?

21. Computing Price Elasticity of Demand
Percentage change in quantity demanded
Percentage change in the price =
If the price elasticity of a demand is greater than 1, the demand is elastic
If the price elasticity of demand equals 1, demand is unit elastic
If the price elasticity of demand is less than 1, demand is inelastic

22. Computing Price Elasticity of Demand

23. Elasticity Along a Linear Demand Curve
Slope measures responsiveness. But slope and elasticity are not the same thing!
Along a linear (straight-line) demand curve, the slope is constant but the elasticity varies.
Along a linear demand curve, demand is:
Unit elastic at the midpoint of the curve.
Elastic above the midpoint of the curve.
Inelastic below the midpoint of the curve.

24. Elasticity Along a Linear Demand Curve

25. Total Revenue and the Price Elasticity of Demand
Total revenue is the amount spent on a good and received by its sellers and equals the price of the good multiplied by the quantity sold
Starbucks Latte -- $3
Demand is 15 cups an hour
Total Revenue is $45 an hour
Total Revenue Test is a method of estimating the price elasticity of demand by observing the change in total revenue that results from a price change

26. Total Revenue and the Price Elasticity of Demand
If demand is elastic:
A given percentage rise in price brings a larger percentage decrease in the quantity demanded.
And total revenue decreases.
If demand is inelastic:
A given percentage rise in price brings a smaller percentage decrease in the quantity demanded.
And total revenue increases.

27. Total Revenue Test Total revenue test:
If price and total revenue change in the opposite directions, demand is elastic.
If a price change leaves total revenue unchanged, demand is unit elastic.
If price and total revenue change in the same direction, demand is inelastic.

28. Total Revenue Test
At $3 a cup, the quantity demanded is 15 cups an hour.
Total revenue is $45 an hour.
When the price rises to $5 a cup, the quantity demanded decreases to 5 cups an hour.
Total revenue decreases to $25 an hour.
Demand is elastic.

29. Total Revenue Test
At $50 a book, the quantity demanded is 5 million books.
Total revenue is $250 million.
When the price rises to $75 a book, the quantity demanded decreases to 4 million books.
Total revenue increases to $300 million.
Demand is inelastic.
Total revenue is $250 million.

30. Addiction and Elasticity
Nonusers’ demand for addictive substances is elastic.
So a moderately higher price leads to a substantially smaller number of people trying a drug.
Existing users’ demand for addictive substances is inelastic.
So even a substantial price rise brings only a modest decrease in the quantity demanded.

31. Price Elasticities of Demand Notes

32. Definition: Price elasticity of demand is
To determine price elasticity of demand: compare the % change in the quantity demanded with the percentage change in price

33. Percentage Price in Change
Starbucks raised the price of a latte from $3 to $5 a cup. What is the percentage change in price? = – x

34. Percentage Change in Price
Starbucks cuts the price of a latte from $5 to $3 a cup. What now is the percentage change in price? = – x

35. Percentage Change in Price
Elasticity compares the percentage change in the quantity demanded with the percentage change in price
Midpoint Method --

36. Percentage Price in Change
Midpoint Method Calculation
Starbucks Latte price changing from $5 to $3. $5 for a new price and $3 for the initial price. x = –
( ) ÷ 2

37. Percentage Change in Price

38. Percentage Change in Quantity Demanded
Price of a Latte rises from $3 to $5 a cup, the quantity demanded decreases from 15 cups to 5 cups an hour.
Uses the midpoint formula again
x 100
Percent change in price =
New price – Initial price
(New Price + Initial Price) ÷ 2

39. Percentage Change in Quantity Demanded
When the price of a good rises, the quantity demanded of it decreases
When the price of a good falls, the quantity demanded of it increases

40. Elastic and Inelastic Demand
Unit Elastic Demand –
Inelastic Demand –

41. Elastic Demand Perfectly Elastic Demand –
Consumers are willing to buy any quantity of the good at a given price but none at a higher price

42. Perfectly Elastic Demand

43. Elastic Demand

44. Unit Elastic Demand

45. Inelastic Demand

46. Perfectly Inelastic Demand

47. Influences on Price Elasticity of Demand
Two influences:
Availability of ________________
Proportion of ___________spent

48. Influences on Price Elasticity of Demand
Demand for good is elastic if a substitute is easy to find
Demand for good is inelastic if a substitute is hard to find

49. Influences on Price Elasticity of Demand
Three factors that influence the ability to find a substitute for a good:

50. Price Elasticity of Demand
The greater the proportion of income spend on a good, the greater is the impact of a rise in its price on the quantity of that good that people can afford to buy and the more elastic it is the demand for that good

51. Computing Price Elasticity of Demand
Percentage change in quantity demanded
Percentage change in the price =
If the price elasticity of a demand is greater than 1, the demand is ____________
If the price elasticity of demand equals 1, demand is ____________
If the price elasticity of demand is less than 1, demand is ____________

52. Computing Price Elasticity of Demand

53. Elasticity Along a Linear Demand Curve
Slope measures responsiveness. But slope and elasticity are not the same thing!
Along a linear (straight-line) demand curve, the slope is constant but the elasticity varies.
Along a linear demand curve, demand is:
____________ at the midpoint of the curve.
____________ above the midpoint of the curve.
____________ below the midpoint of the curve.

54. Elasticity Along a Linear Demand Curve

55. Total Revenue and the Price Elasticity of Demand
Total revenue is the amount spent on a good and received by its sellers and equals the price of the good multiplied by the quantity sold
Starbucks Latte -- $3
Demand is 15 cups an hour
Total Revenue is $45 an hour
Total Revenue Test is a method of estimating the price elasticity of demand by observing the change in total revenue that results from a price change

56. Total Revenue and the Price Elasticity of Demand
If demand is elastic:
If demand is inelastic:

57. Total Revenue Test Total revenue test:
If price and total revenue change in the opposite directions, demand is ________
If a price change leaves total revenue unchanged, demand is ____________.
If price and total revenue change in the same direction, demand is ____________.

58. Total Revenue Test
At $3 a cup, the quantity demanded is 15 cups an hour.
Total revenue is ____________
When the price rises to $5 a cup, the quantity demanded decreases to 5 cups an hour.
Total revenue decreases to ____________.
Demand is ____________.

59. Total Revenue Test
At $50 a book, the quantity demanded is 5 million books.
Total revenue is ____________
When the price rises to $75 a book, the quantity demanded decreases to 4 million books.
Total revenue increases to ____________.
Demand is ____________.
Total revenue is $250 million.

60. Addiction and Elasticity
Nonusers’ demand for addictive substances is ____________.
Existing users’ demand for addictive substances is ____________.