Ch 4 Price Elasticity of Demand and supply note new.pdf
Thompson Rivers University
Price Elasticity of Demand
Responsiveness of Quantity demanded to a change in price.
% Q d Q d averageQ d
% P P averageP
Since the price elasticity of demand is always negative we ignore the negative sign.
Quantity demanded responds a lot
E > 1
Quantity demanded does not responds a lot
%ΔQ < %ΔP
If d = 2, then the percent change in quantity is twice the percent change in price.
(for example: 1% increase in price leads to a 2% decrease in quantity.)
Elasticity of demand varies along a straight line demand curve.
2 4 6 8 10
d E d 1
Relationship between Total Expenditure (Total Revenue) and Price Elasticity of Demand.
0 2 4 6 8 10 Quantity
0 2 4 6 8 10
Quantity Total Revenue and the Price Elasticity of Demand:
TR = P × Q
If at the current price, demand is elastic then an increase in price will reduce total revenue.
↓ TR = ↑ P × ↓ Q
If at the current price, demand is inelastic then an increase in price will increase total revenue.
↑ TR = ↑ P × ↓ Q
If at the current price, demand is unitary elastic
then an increase in price will not change total revenue.
TR = ↑ P × ↓ Q
Demand is perfectly elastic
Demand is perfectly inelastic
Demand is unitary elastic