1.  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

2.  When Q D responds strongly to a change in P, demand is elastic  When Q D responds weakly to a change in P, demand is inelastic percentage change in quantity demanded of product X percentage change in price of product X E d = © 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO1 2

3.  If the quantity demanded increased from 4 to 5 units the percentage change would be:  %ΔQ d = ΔQ d /Q 0 = ¼ x 100 = 25%  If the quantity demanded dropped from 5 to 4, the percentage change would be:  %ΔQ = ΔQ d /Q 0 = 1/5 x 100 = 20%  Which percentage change in Q d do we use? 25% or 20%?  To avoid confusion about start and end point we use average change in Q d and the average change in P. © 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO1 3

4. If the quantity demanded increased from 4 to 5 units the percentage change would be: © 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO1 4

5.  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

6. LO1  Ed > 1 demand is elastic  Ed = 1 demand is unit elastic  Ed < 1 demand is inelastic  Extreme cases  Perfectly inelastic  Perfectly elastic © 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO1 6

7. D1D1 P Perfectly inelastic demand (Ed = 0) 0 © 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO1 7

8. Perfectly elastic demand P D2D2 Perfectly elastic demand (Ed = ∞) 0 © 2013 McGraw-Hill Ryerson Ltd. Chapter 4, LO1 8