PRICE ELASTICITY

• Measures how responsive is demand to a change in price

• When price rises, how much quantity demanded will fall (vs)
 FORMULA:

d = %  Quantity Demanded
%  Price

d = Q 2 – Q1 x P1
Q1 P2 – P1
Elastic Demand
• A small percentage change
in the price of a product
will lead to a larger
percentage change in the
quantity demanded.
• EXAMPLE; when the price
of compact discs increases
5%, the quantity
demanded decreased by
10%
• Goods with high
substitutes (toothpaste,
clothes)
Inelastic Demand
• A large percentage change
in price will only affect the
quantity demanded by a
small percentage.
• EXAMPLE; a 10% increase
in the price of petrol will
lead to a slight decrease of
2% in the quantity
demanded.
• Goods with low
substitutes (petrol &
cigarettes)
 Unitary Elastic
Demand
• A percentage change in
price equals a percentage
in quantity demanded .
• EXAMPLE; a 5% fall in
price will leads to a 5%
increase in the quantity
demanded.
Perfectly Inelastic
Demand
• The quantity demanded
does not change as the
price change.
• EXAMPLE; when the price
of insulin increases by
10%, the quantity
demanded remains the
same (0% change)
• Diabetic patients cannot
change their consumption
based on price.
 Perfectly Elastic
Demand
• A small percentage change
in the price leads to an
infinite percentage change
in the quantity demanded.
• EXAMPLE; when the price is
at RM10, the quantity
demanded would be 5
units. When there is a price
change (increase/decrease),
there will be zero quantity
demanded.
• Perfectly elastic demand is
very rare in real life.
 Proportion of the
expenditure on a Nature of
Existence of product goods
substitutes

DETERMINANTS
Frequently Income level
purchased OF PRICE
products ELASTICITY OF
DEMAND

Time
Complementary dimension
goods Habits
 RELATIONSHIP TO TOTAL
REVENUE
Total Revenue (TR) = Price (P) x Quantity (Q)

The information on price elasticity of demand will be useful

Price
for the seller to adjust their selling price since it will affect
the total revenue.

DEMAND IS ELASTIC
RM50

Total Revenue
RM50 x 10 = RM500
RM 20
If seller increases price to RM30
New Total Revenue
= RM30 x 15 = RM450
 TR =  RM50
D

10 15
Quantity Demanded
 RELATIONSHIP TO TOTAL
REVENUE (cont.)
Total Revenue (TR) = Price (P) x Quantity (Q)

Price
DEMAND IS INELASTIC

RM20 Total Revenue

RM10 x 15 = RM150
If seller increases price to RM2
RM10
New Total Revenue
= RM20 x 10 = RM200
 TR =  RM50

10 15
Quantity Demanded
 RELATIONSHIP TO TOTAL
REVENUE (cont.)
Total Revenue (TR) = Price (P) x Quantity (Q)

DEMAND IS UNITARY ELASTIC

Price

Total Revenue

RM20 RM10 x 20 = RM200

If seller increases price to RM2
New Total Revenue
RM10 = RM20 x 10 = RM200
 TR =  0

10 20
Quantity Demanded
Measures the responsiveness or sensitivity of changes
in the quantity demanded for a product due to a
change in income.
Income elasticity of demand = %∆ 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅
%∆ 𝒊𝒏 𝒊𝒏𝒄𝒐𝒎𝒆
 Inelastic Income
• The quantity demanded
for a product increases as
income increases.
• The type of good
identified will be normal
good. (Food & clothing)
• The curves of the graph
are upward sloping
 Elastic Income
• Income increases, quantity
demanded increases
although the latter
increases at a faster rate.
• The type of good
identified will be luxury
good. (Antique, furniture,
luxury car, gold &
jewellery)
 Negative Income
Elasticity of Demand
• Demanded for a product
decreases as income
increases.
• Type of goods – giffen
good or inferior good
(used cars, salted fish, low
grade potatoes)
 Zero Income
Elasticity of Demand
• The quantity demanded
for a product does not
change although income
increases.
• Type of goods – necessity
goods (rice, vegetables,
salt)
Measures the responsiveness or sensitivity of quantity
demanded for a product (Qdx) due to a change in the
price of a related product (Py).
 Positive Cross
Elasticity
• Increase in the price of a
product will increase the
quantity demanded for
another product.
• Applicable to: Substitute
goods (Chicken-Beef)
 Negative Cross
Elasticity
• Increase in the price of a
product will decrease the
demand for another
product.
• Applicable to:
Complementary goods
(price of ink ↑, quantity
demanded for pens ↓)
 Zero Cross Elasticity
• Increase in the price of a
product will not affect the
quantity demanded for
another product.
• The product has no
relationship
• For example, the increase
in price of oil has no effect
on the demanded of
houses.
 Time Period
Technology
improvements

Availability and
mobility of
DETERMINANTS factors of
OF PRICE production
ELASTICITY OF
SUPPLY

Nature of the
Perishability
market
Case and Fair (2007), Principles of Microeconomics (8Ed):
Pearson International

Jamal, A. Norizan, M and Zuraidah Y., (1999) Principles of

Economics, Universiti Teknologi MARA Shah Alam

N. Gregory Mankiw (2004) Principles of Economics (Third

Edition), South Western: USA

Sloman, J (2007) Essentials of Economics, Prentice Hall

Vengedesalam, D. and Madhavan, K (2013). Principles of
Economics (Third Edition), Oxford Fajar