Price Elasticity of Demand

Demand is Elastic if the proportional change in Quantity is greater than the proportional change in price.

Example: Price increases by 5% & the quantity demanded falls by 6%...

Demand is Unitary when the proportional change in quantity is equal to the proportional change in price.

Example: Price falls by 5% & the demand rises by 5%...

Demand is inelastic if the proportional change in quantity is less than the proportional change in price.

Example: Price falls by 5% & the demand increases by 2%...

PED = % change in quantity demanded

% change in price

Gain in total revenue (5%0

Loss in total revenue (6%)

Quantity

P

P1

Q Q1

Elastic demand P.E.D. = (>1)

Price

Loss in total revenue

Gain in total revenue

Price

Quantity

P

P1

Q Q1

Inelastic demand P.E.D. = (<1)

Features of Price Elasticity of Demand

Feature Elastic Goods Inelastic Goods

PED value Greater than 1 Less than 1

Price rise means Larger fall in demand Smaller fall in demand

Slope of demand curve

Flat Steep

Number of substitutes

Many Few

Type of good Luxury Necessity

Price of good Expensive Cheap

Example Jaguar cars Petrol

Price Elasticity of Supply

Price elasticity of supply (PES) measures the responsiveness of supply to a given change in price.

PES = % change in quantity supplied

% change in price

Supply is said to be elastic when the quantity changes by a greater proportion than the price change.

Inelastic supply is when quantity changes by a smaller proportion than the price change.

Features of Elasticity of Supply

Feature Elastic Goods Inelastic Goods

PES Value Greater than 1 Less than 1

A prise rise means A larger rise in supply A smaller rise in supply

Slope of supply curve Flat Steep

The good is produced Rapidly Slowly

The time period is Months Days

The firm has Large stocks Limited stocks

Example Screws Beef

Formation of a Market Price

In the market place the forces of Supply & Demand interact to create a market price.

In economics this is known as the equilibrium price – the price at which the quantity demanded equals the quantity supplied…

Price of

Fish

Quantity Demanded

Quantity Supplied

60p 300 600

55p 400 550

50p 500 500

45p 600 450

40p 700 400

35p 800 350

Price

60

50

40

30

20

10

0Quantity 100 200 300 400 500 600 700 800

D S

The equilibrium price is 50p. At this price the quantity that will be bought & sold is 500