PRICE ELASTICITY OF DEMAND

The Price Elasticity of Demand (commonly known as just price elasticity) measures the
rate of response of quantity demanded due to a price change.
The formula for the Price Elasticity of Demand (PEoD) is:

PEoD = (% Change in Quantity Demanded)/(% Change in Price)

Price Quantity Demanded Quantity Supplied

7 200 50

8 180 90

9 150 150

10 110 210

11 60 250

Calculating the Price Elasticity of Demand

You may be asked the question "Given the following data, calculate the price elasticity
of demand when the price changes from 9.00 to 10.00"

Price(OLD)=9
Price(NEW)=10
QDemand(OLD)=150
QDemand(NEW)=110

Calculating the Percentage Change in Quantity Demanded

[QDemand(NEW) - QDemand(OLD)] / QDemand(OLD)

[110 - 150] / 150 = (-40/150) = -0.2667

We note that % Change in Quantity Demanded = -0.2667 (We leave this in decimal
terms. In percentage terms this would be -26.67%). Now we need to calculate the
percentage change in price.

Calculating the Percentage Change in Price

[Price(NEW) - Price(OLD)] / Price(OLD)

[10 - 9] / 9 = (1/9) = 0.1111

Final Step of Calculating the Price Elasticity of Demand

We go back to our formula of:

PEoD = (% Change in Quantity Demanded)/(% Change in Price)

PEoD = (-0.2667)/(0.1111) = -2.4005

When we analyze price elasticities we're concerned with their absolute value, so we
ignore the negative value. We conclude that the price elasticity of demand when the
price increases from 9 to 10 is 2.4005.

How Do We Interpret the Price Elasticity of Demand?

• If PEoD > 1 then Demand is Price Elastic (Demand is sensitive to price changes)
• If PEoD = 1 then Demand is Unit Elastic
• If PEoD < 1 then Demand is Price Inelastic (Demand is not sensitive to price
changes)

Recall that we always ignore the negative sign when analyzing price elasticity, so PEoD
is always positive. In the case of our good, we calculated the price elasticity of demand
to be 2.4005, so our good is price elastic and thus demand is very sensitive to price
changes.
PRICE ELASTICITY OF SUPPLY

The Price Elasticity of Supply measures the rate of response of quantity demand due to
a price change.

We calculate the Price Elasticity of Supply by the formula:

PEoS = (% Change in Quantity Supplied)/(% Change in Price)

Price Quantity Demanded Quantity Supplied

7 200 50

8 180 90

9 150 150

10 110 210

11 60 250

Calculating the Price Elasticity of Supply

You may be asked "Given the following data, calculate the price elasticity of supply
when the price changes from 9.00 to 10.00"

Price(OLD)=9
Price(NEW)=10
QSupply(OLD)=150
QSupply(NEW)=210

Calculating the Percentage Change in Quantity Supply

[QSupply(NEW) - QSupply(OLD)] / QSupply(OLD)

[210 - 150] / 150 = (60/150) = 0.4

So we note that % Change in Quantity Supplied = 0.4 (This is in decimal terms. In
percentage terms it would be 40%). Now we need to calculate the percentage change in
price.

Calculating the Percentage Change in Price

[Price(NEW) - Price(OLD)] / Price(OLD)

[10 - 9] / 9 = (1/9) = 0.1111

We have both the percentage change in quantity supplied and the percentage change
in price, so we can calculate the price elasticity of supply.

Final Step of Calculating the Price Elasticity of Supply

We go back to our formula of:

PEoS = (% Change in Quantity Supplied)/(% Change in Price)

PEoD = (0.4)/(0.1111) = 3.6

When we analyze price elasticities we're concerned with the absolute value, but here
that is not an issue since we have a positive value. We conclude that the price elasticity
of supply when the price increases from 9 to 10 is 3.6.

How Do We Interpret the Price Elasticity of Supply?

• If PEoS > 1 then Supply is Price Elastic (Supply is sensitive to price changes)
• If PEoS = 1 then Supply is Unit Elastic
• If PEoS < 1 then Supply is Price Inelastic (Supply is not sensitive to price
changes)

Recall that we always ignore the negative sign when analyzing price elasticity, so PEoS
is always positive. In our case, we calculated the price elasticity of supply to be 3.6, so
our good is price elastic and thus supply is very sensitive to price changes.