------Chapter 6: Elasticities – Extension of Demand and Supply Analysis-----
PRICE ELASTICITY OF DEMAND
What is Price Elasticity of Demand?
Definition: Price Elasticity of Demand (PED or Ed) measures how strongly consumers respond to price
changes.
In simpler terms: It answers this question: If the price of something goes up or down, how much more
or less will people buy it?
There are TWO MAIN types of price responsiveness that consumers can show (Two Basic Reactions):
(1) ELASTIC DEMAND (Big Reaction):
This is when consumers react a lot to a change in price.
In simpler terms: If the price of something goes up just a little, people stop buying it.
If the price goes down, people rush to buy more.
A small price change → A big change in quantity demanded.
Example: Takeaway food or luxury brands like Nike. If prices rise, most students will just say: "No
thanks” and stop buying.
Note: Elastic demand means Ed > 1
(2) INELASTIC DEMAND (Small Reaction):
This is when consumers barely react to a price change.
In simpler terms: Even if the price increases or decreases, people still buy it —because they need
it or there’s no substitute. Consumers don’t really care about the price.
A big price change → Only a small change in quantity demanded.
Example: Salt, petrol, toothpaste or medicine. Even if the price of petrol goes up, people still fill
their tanks.
Note: Inelastic demand means Ed < 1
, POINT ELASTICITY (ALSO CALLED "PRICE ELASTICITY COEFFICIENT")
Point Elasticity of Demand is a method used in Economics to measure how sensitive the quantity
demanded is to a change in price, using one specific point on the demand curve.
In simpler terms: It answers the question: “If price changes at one point, by how much will people
change the amount they buy?”
What does the formula tell us? It tells you that you're calculating elasticity by using the exact
original and new prices and quantities (before and after the change), WITHOUT AVERAGING, to
measure how much quantity demanded responds to a specific price change.
FORMULA:
N.B: This gives us a number that tells us how demand reacts to price changes.
This Formula can be broken into:
This is the percentage change This is the percentage change
in quantity demanded in price.
How to calculate: How to calculate:
Change in quantity= Q2 - Q1 Change in price = P2 – P1
You're dividing two percentages:
The % change in quantity
demanded, and the % change in
price
The Formula can also be written in symbol form:
,Example from the book:
A movie ticket price drops from R50 to R40, and demand increases from 200 to 300. Now plug in the
values:
What can be learnt from this example?
Ed = 2.5.
This means that demand is very responsive to price changes. A 1% decrease in price caused a 2.5%
increase in quantity demanded. This means demand is elastic.
Midpoint or Arc Elasticity Formula
The Problem with Point Elasticity:
If you switch the order of P1 and P2 or Q1 and Q2, your percentage changes change too! This is
confusing and gives different answers depending on direction.
The Solution: Use the average (midpoint):
This is the difference between the This is the difference between the
new quantity demanded (Q2) new price (P2) and the old price
and the old quantity demanded (P1).
Add the new quantity (Q2) and Add the new price (P2) and old
old quantity (Q1), then divide by 2. price (P1), then divide by 2.
The Formula can also be written in symbol form:
, Important: By using the AVERAGE (MIDPOINT) FORMULA, it doesn’t matter if you calculate from R5
→ R4 or R4 → R5. It gives the same result.
This is called arc elasticity – and it’s more reliable for large changes in price or quantity.
Example from the Textbook:
Price drops from R5 to R4. Quantity increases from 10 to 20.
( ) ( )
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑝𝑟𝑖𝑐𝑒 = = 𝑅4.50 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 = = 15
20 − 10 10
15 0.67
𝑬d = = 15 = = −𝟑
4−5 −1 −0.222
4.5 4.5
Hence, Ed = 3. This tells us that demand is ELASTIC.
Why Use Percentages?
There are 2 key reasons:
(1) TO AVOID CONFUSION WHEN THE UNIT OF MEASUREMENT CHANGES
If you use just the actual amount, it can trick you depending on the units (rands, cents,
kilograms, etc).
Example: If the price of popcorn falls from R30 to R20, and people buy more popcorn (from
60 bags to 100 bags), it looks like a big change in the number of bags (40 extra bags).
Now imagine we measure in cents instead:
R30 = 3000 cents and R20 = 2000 cents. The price change is now 1000 cents!
Problem: It seems like a HUGE price change (1000 units!) even though it’s just R10. If we just
look at the number 1000, it will make it look like demand is not very responsive. So, it gives us
the wrong impression!
The solution for this would be: Use percentages, because percentages stay the same no
matter what units you use (rands or cents).
In simpler terms: Using % makes sure we don't get confused by how big or small the numbers
are.
(2) TO FAIRLY COMPARE DIFFERENT PRODUCTS
Some things are cheap (like a R1 lollipop), others are expensive (like a R1,000,000 car).
A R1 increase in price looks very different depending on what you are buying.
Example:
If the price of a car (with a current value of R1,000,000) rises by R1, it is almost no change
(0.0001%).
However, if the price of a lollipop (with a current value of R1) rises by R1, it doubles (100%
increase!).
The solution for this would be: Use percentages to compare how sensitive consumers are for
different goods fairly.
In simpler terms: If we use %, we can compare a lollipop and a car properly without being
misled.
PRICE ELASTICITY OF DEMAND
What is Price Elasticity of Demand?
Definition: Price Elasticity of Demand (PED or Ed) measures how strongly consumers respond to price
changes.
In simpler terms: It answers this question: If the price of something goes up or down, how much more
or less will people buy it?
There are TWO MAIN types of price responsiveness that consumers can show (Two Basic Reactions):
(1) ELASTIC DEMAND (Big Reaction):
This is when consumers react a lot to a change in price.
In simpler terms: If the price of something goes up just a little, people stop buying it.
If the price goes down, people rush to buy more.
A small price change → A big change in quantity demanded.
Example: Takeaway food or luxury brands like Nike. If prices rise, most students will just say: "No
thanks” and stop buying.
Note: Elastic demand means Ed > 1
(2) INELASTIC DEMAND (Small Reaction):
This is when consumers barely react to a price change.
In simpler terms: Even if the price increases or decreases, people still buy it —because they need
it or there’s no substitute. Consumers don’t really care about the price.
A big price change → Only a small change in quantity demanded.
Example: Salt, petrol, toothpaste or medicine. Even if the price of petrol goes up, people still fill
their tanks.
Note: Inelastic demand means Ed < 1
, POINT ELASTICITY (ALSO CALLED "PRICE ELASTICITY COEFFICIENT")
Point Elasticity of Demand is a method used in Economics to measure how sensitive the quantity
demanded is to a change in price, using one specific point on the demand curve.
In simpler terms: It answers the question: “If price changes at one point, by how much will people
change the amount they buy?”
What does the formula tell us? It tells you that you're calculating elasticity by using the exact
original and new prices and quantities (before and after the change), WITHOUT AVERAGING, to
measure how much quantity demanded responds to a specific price change.
FORMULA:
N.B: This gives us a number that tells us how demand reacts to price changes.
This Formula can be broken into:
This is the percentage change This is the percentage change
in quantity demanded in price.
How to calculate: How to calculate:
Change in quantity= Q2 - Q1 Change in price = P2 – P1
You're dividing two percentages:
The % change in quantity
demanded, and the % change in
price
The Formula can also be written in symbol form:
,Example from the book:
A movie ticket price drops from R50 to R40, and demand increases from 200 to 300. Now plug in the
values:
What can be learnt from this example?
Ed = 2.5.
This means that demand is very responsive to price changes. A 1% decrease in price caused a 2.5%
increase in quantity demanded. This means demand is elastic.
Midpoint or Arc Elasticity Formula
The Problem with Point Elasticity:
If you switch the order of P1 and P2 or Q1 and Q2, your percentage changes change too! This is
confusing and gives different answers depending on direction.
The Solution: Use the average (midpoint):
This is the difference between the This is the difference between the
new quantity demanded (Q2) new price (P2) and the old price
and the old quantity demanded (P1).
Add the new quantity (Q2) and Add the new price (P2) and old
old quantity (Q1), then divide by 2. price (P1), then divide by 2.
The Formula can also be written in symbol form:
, Important: By using the AVERAGE (MIDPOINT) FORMULA, it doesn’t matter if you calculate from R5
→ R4 or R4 → R5. It gives the same result.
This is called arc elasticity – and it’s more reliable for large changes in price or quantity.
Example from the Textbook:
Price drops from R5 to R4. Quantity increases from 10 to 20.
( ) ( )
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑝𝑟𝑖𝑐𝑒 = = 𝑅4.50 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 = = 15
20 − 10 10
15 0.67
𝑬d = = 15 = = −𝟑
4−5 −1 −0.222
4.5 4.5
Hence, Ed = 3. This tells us that demand is ELASTIC.
Why Use Percentages?
There are 2 key reasons:
(1) TO AVOID CONFUSION WHEN THE UNIT OF MEASUREMENT CHANGES
If you use just the actual amount, it can trick you depending on the units (rands, cents,
kilograms, etc).
Example: If the price of popcorn falls from R30 to R20, and people buy more popcorn (from
60 bags to 100 bags), it looks like a big change in the number of bags (40 extra bags).
Now imagine we measure in cents instead:
R30 = 3000 cents and R20 = 2000 cents. The price change is now 1000 cents!
Problem: It seems like a HUGE price change (1000 units!) even though it’s just R10. If we just
look at the number 1000, it will make it look like demand is not very responsive. So, it gives us
the wrong impression!
The solution for this would be: Use percentages, because percentages stay the same no
matter what units you use (rands or cents).
In simpler terms: Using % makes sure we don't get confused by how big or small the numbers
are.
(2) TO FAIRLY COMPARE DIFFERENT PRODUCTS
Some things are cheap (like a R1 lollipop), others are expensive (like a R1,000,000 car).
A R1 increase in price looks very different depending on what you are buying.
Example:
If the price of a car (with a current value of R1,000,000) rises by R1, it is almost no change
(0.0001%).
However, if the price of a lollipop (with a current value of R1) rises by R1, it doubles (100%
increase!).
The solution for this would be: Use percentages to compare how sensitive consumers are for
different goods fairly.
In simpler terms: If we use %, we can compare a lollipop and a car properly without being
misled.
