Chapter Five

Applications of
Demand and
Supply
 Price Elasticity of Demand

It measure how much the quantity demanded

of a good changes when its price changes.
Elasticity of Demand (E.D)=

% Change in quantity Demanded

E.D =
% change in Price
 Price Elasticity of Demand (Continue..

Q2 - Q1
X 100
Q1
E.D =
P2 - P1
X 100
P1
 Price Elasticity of Demand (Continue..

Price

$5
4
Demand

( 1 -0500 )
( 1 +050 0 ) /2
E D=
(4 .0- 5 0.0 0 )
( 4 .0+ 5 0.0 0 )/ 2

6 p7 e rc e n t
= = -3
- 2 2p e rc e n t

0 50 Quantity
100
Demand is price elastic
4
Price Elasticity of Demand (Continue..

 Price-elastic demand:- When 1% change

in price calls more than 1% change in
quantity demand
 Price-inelastic demand:- When 1%
change in price calls less than 1% change in
quantity demand.
 Unit-elastic demand:- When 1% change in
price is equal to 1% change in quantity
demand.
 Elastic Demand: Elasticity Is Greater Than 1
Price

$5

4 Demand
1. A 22%
increase
in price . . .

0 50 100 Quantity

2. . . . leads to a 67% decrease in quantity demanded.

 Inelastic Demand: Elasticity Is Less Than 1

Price

$5

4
1. A 22% Demand
increase
in price . . .

0 90 100 Quantity

2. . . . leads to an 11% decrease in quantity demanded.

Figure 1 The Price Elasticity of Demand

Unit Elastic Demand: Elasticity Equals 1

Price

$5

4
1. A 22% Demand
increase
in price . . .

0 80 100 Quantity

2. . . . leads to a 22% decrease in quantity demanded.

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Price Elasticity of Demand (Continue..

 Perfect Elastic Demand: No change in

Price, but large change in quantity
demanded

 Perfect Inelastic Demand: large change in

Price but no change in quantity demanded
Figure 1 The Price Elasticity of Demand

Perfectly Inelastic Demand: Elasticity Equals 0

Price
Demand

$5

4
1. An
increase
in price . . .

0 100 Quantity

2. . . . leaves the quantity demanded unchanged.

Copyright©2003 Southwestern/Thomson Learning

 Figure 1 The Price Elasticity of Demand

Perfectly Elastic Demand: Elasticity Equals Infinity

Price

1. At any price
above $4, quantity
demanded is zero.
$4 Demand

2. At exactly $4,
consumers will
buy any quantity.

0 Quantity
3. At a price below $4,
quantity demanded is infinite.
Elasticity is not same as slope

ED>1

ED=1

ED<1