Name ____________________

11 ATAR Economics
Price Elasticity of Demand – Worksheet 1

1. Define price elasticity of demand.

The responsiveness of quantity demanded to a change in price of the good or service.

2. Explain the difference between elastic and inelastic demand.

Elastic demand occurs when demand is price sensitive. A price increase will cause a proportionally larger decrease in
demand for that good or service. Inelastic demand occurs when demand is not very sensitive to prices changes. An
increase in price will cause a proportionally smaller decrease in demand for a good or service.

3. If price elasticity of demand is 0.4, what does that indicate?

A price elasticity of demand of 0.4 indicates that demand is relatively inelastic and not very sensitive to price
changes. A 1% increase in price will only cause a 0.4% decrease in quantity demanded.

4. What is the formula for measuring price elasticity of demand?

ED = %ΔQ / %ΔP

5. Would the demand for alcohol be elastic or inelastic? Explain why.

Demand for alcohol is relatively price inelastic as there are no close substitutes and alcohol is an addictive substance
to some consumers, which classifies the good as a necessity for those consumers.

6. Would the demand for orange juice be elastic or inelastic? Explain why.

Demand for orange juice is relatively elastic because there are many available substitutes (such as apple juice) and
orange juice is not considered a necessity so consumers can go without the good without it impacting on their
standard of living.
 7. What is the midpoint method for measuring elasticity?

Using the average price and quantity (the midpoint) instead of the original price and quantity to calculate price
elasticity of demand. This method eliminates the problem of calculating different elasticity coefficients depending on
whether the price change is an increase or a decrease (as occurs when using the point method).

8. Draw a perfectly elastic demand curve.

9. Draw a relatively inelastic demand curve.

10. Explain the following statement: If all petrol stations increased their petrol prices by 10%, demand would be
inelastic. But if BP was the only company to increase their prices by 10%, its demand would be elastic.

The demand for petrol is relatively inelastic for three main reasons:
1. There aren’t close substitutes available – petrol cars can only use petrol as fuel
2. Petrol is considered a necessity for many car owners
3. Changes in price do not cause changes to quantity demanded in the short run because it takes time to react to a
price change. In the long run a car owner may purchase a diesel or electric car if petrol prices rise continually over
time.

The demand for BP petrol is more price elastic because of a change in the above circumstances. Reasons two and three still
hold true for BP petrol but the difference between the Petrol Market and the BP Petrol Market is that for BP there are many
very close substitutes (Shell, Caltex etc.). Because there are many close substitutes, if BP increase their prices, consumers can
easily go to another petrol station charging the lower price for the same product. Therefore, the demand for BP petrol is
elastic.