PRICE ELASTICITY OF DEMAND NOTES - 2.1

])
( g ( measure


responsiveness of
of the

the

J quantity of a
good
) ) \ If quantity demanded
demanded to

is
highly
changes
responsive
in


to
price
price

demand is PRICE ELASTIC ; if quantity demanded is not
very
Because of the
negative relationship responsive demand .
is PRICE INELASTIC


between price and quantity of a
good PED
percentage change in quantity demanded Q
=
=



demanded ,
the % DQ and % DP will differ % AP
and
percentage change price in

in terms of signs (t l ) -




always PED L O .




But the sign has no economic
meaning and ↳
Dad 10/0 DQ Qt in al Q initial
-


x →
PED is considered a positive number PED =
=
OF
→ Q initial



RANGE OF VALUES
IPP x i fo IP
P →
→ Penal
P initial
- P initial




the value of PED demanded
larger greater the responsiveness of quantity
°

,




due to
Magnitude / value of PED for product between different demographic
°
a can
vary groups
factors like age disposable income etc
-


, ,




to
unresponsive / insensitive
O) :
↳ PED <
I ( but
greater than PRICE INELASTIC ; QD is
relatively
demand AP > DQD that it takes
changes &
price inelastic which
-



means
price is
-




in a




€
"
relatively large price change to generate a



quantity demanded Producers reaction
'
% DP % DQD
change in
.
s
← .




would inelastic demand T O
generally PED 22
: the L
since
increase
price ,
E



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-


'
"



Hence, total revenue would increase .




Q
o Q2 Q,
5-
yo



↳ PED > 1 : PRICE ELASTIC ; QD is
responsive / sensitive to a
change in price ; demand is
price elastic
DQD DP small
generates
>
a
relatively change in
price p
-




Producers Reaction : would
'



change
a
quantity demanded
in

¥
.




-
.




µ
decrease
generally decrease the price since ,
even a small in




price would demanded by large amounts
increase the
quantity
and hence would result in an increase in total revenue




Qa Q i
Q
10%

, SPECIAL CASES

quantity demanded
I PED =L : DEMAND IS UNIT ELASTIC ;
change in
pence is EQUAL to
change
'



in
.




P
change would result proportional
-




a
price in a

↳
change in quantity demanded .




•




2 PED O
-



=
: DEMAND IS PERFECTLY INELASTIC
P D
% DQD
change quantity
O
-




no
Q
-



in
-




Q2 Q ,

demanded Caen stant)
regardless of 5%
changes in
price

o Q p
Qi


3 D
PED as : DEMAND PERFECTLY ELASTIC
'



=
is
P
,



change in
price results in an
infinitely large response
in
quantity demanded o
Q




PED AND THE STEEPNESS OF THE DEMAND CURVE



*
flatter the demand curve , the more elastic the demand ( higher the PED)

* demand ( lower the
steeper the demand curve ,
less elastic the PED )

drawn different scales
these statements are not accurate while
comparing demand
-




curves on
=



PED be compared also by intersecting demand the
graph
-




can curves on same


P




p tf quantity
price falls from P to Pz
, ,
resulting percentage change in



demanded will be
larger for D, ( increase from Q, to Qz ) than for
Py - - - - - - - - - - - - - - - - -

go
,
i Q2 ( increase from Q, to Q2 )
,
"
pz
- - - - - - -
-
- - - - - - - - - -



"

i
iDz Dr

,
0
Q1 Q2 Qs Q