When the percentage change in quantity demanded is exactly equal to the percentage change in the price demand is?

Consumer demand for food is an important element in the formulation of various agricultural and food policies. For consumers, changes in food prices and per capita income are influential determinants of food demand. Estimates of consumer demand quantify the effects of prices and total expenditures on the demand for food. The estimates inform policymakers and researchers about how consumers make food purchasing decisions and help policymakers design effective nutrition policy.

Definitions

Consumer demand can be estimated within an unconditional demand system or within a conditional demand system. An unconditional demand system recognizes the interdependent relationships among all products purchased—food and nonfood products. A conditional demand system includes an interdependent relationship among a group of closely related foods—for example the dairy group with milk, cheese, ice cream, and butter. Estimates from an unconditional demand system give a more complete picture of substitution between products, whereas estimates from a conditional demand system ignore substitution for products not within the group.

Consumer demand is often measured as an elasticity, a relative measure that provides a useful means of comparison across all ranges of quantities. The price elasticity of demand is a measure of the responsiveness of demand to a change in price.

The own-price elasticity of demand is a measure of the responsiveness of demand for a product to a change in the price of that product; in other words, the percent change in the quantity of a product resulting from a 1-percent change in its own price. For example, an own-price elasticity for apples of –0.58 means that a 1-percent increase in the price of apples decreases demand for apples by 0.58 percent.

  • A food is said to be unitary elastic if the absolute value of its own-price elasticity is exactly equal to 1, meaning that a 1-percent change in the price of the food decreases the demand by exactly 1 percent.
    • Note: The absolute value of a number is the magnitude of that number without regard to its sign. For instance, the absolute value of –1 is 1.
  • A food is said to be price inelastic—not responsive to price—when the absolute value of its own-price elasticity is less than 1.0.
  • A food is said to be price elastic—responsive to price—when the absolute value of its own-price elasticity is greater than 1.0.

The cross-price elasticity of demand measures the responsiveness in the quantity demanded for one product when the price for another product changes; in other words, the percent change in the quantity of a product resulting from a 1-percent change in the price of another product. The sign of the cross-price elasticity (positive or negative) indicates whether the two products are substitutes or complements.

  • A positive cross-price elasticity means that the products are substitutes. For example, the cross-price elasticity for beef with respect to the price of pork is 0.33, meaning that a 1-percent increase in the price of pork increases demand for beef by 0.33 percent.
  • A negative cross-price elasticity means that the products are complements. For example, the cross-price elasticity for coffee and tea with respect to milk is –0.04, meaning that a 1-percent increase in the price of milk decreases demand for coffee and tea by –0.04 percent.

The expenditure elasticity of demand is a measure of the responsiveness of demand to changes in total expenditures. For conditional demand, this would be expenditures on a similar bundle of products, and for unconditional demand, this would be expenditures for all food and nonfood products. For example, the expenditure elasticity for foods from limited-service restaurants—restaurants with counter service—is 0.18, meaning that a 1-percent increase in total expenditures on all food and nonfood items increases demand for limited-service meals and snacks by 0.18 percent.

ERS research

ERS conducts research on food demand in a domestic and international context.

United States

ERS researchers are updating and refining estimates of demand for food in the United States, including price and expenditure elasticities. The latest information is in the following report:

The Demand for Disaggregated Food-Away-From-Home and Food-at-Home Products in the United States

In this report, ERS estimated unconditional own-price, cross-price, and total expenditure elasticities for nonfood products, alcoholic beverages, and the following 41 food products:

  • 3 food-away-from-home (FAFH) products:
    • Limited-service restaurants;
    • Full-service restaurants;
    • Other FAFH venues, including vending machines and mobile vendors;
  • 38 food-at-home (FAH) products:
    • Flour and prepared flour mixes; breakfast cereals; rice and pasta; nonwhite bread; white bread; biscuits, rolls, and muffins; cakes and cookies; and other bakery products;
    • Beef; pork; other red meat; poultry; and fish;
    • Cheese; ice cream and frozen desserts; milk; and other dairy;
    • Apples; bananas; citrus; other fruits; potatoes; lettuce; tomatoes; other vegetables; and processed fruits and vegetables;
    • Carbonated drinks; frozen noncarbonated drinks; coffee and tea; soups; frozen meals; snacks; sauces and condiments; other miscellaneous; eggs; sugar and sweets; and fats and oils.

The unconditional elasticities of demand in ERS's report can be used to forecast food consumption and analyze the effects of retail price changes on quantities of food purchased. For an outlook projection, information about changes in prices and income can be used to forecast food quantities demanded. As an example, ERS used forecasted price changes of the Consumer Price Index (CPI) estimated by ERS (Food Price Outlook) with the elasticities of demand to predict changes in expenditures on food.

The Demand for Disaggregated Food-Away-From-Home and Food-at-Home Products in the United States

International

ERS also estimates demand for food in an international context. In the report, Cross-Price Elasticities of Demand Across 114 Countries, ERS presents own- and cross-price and expenditure elasticities of demand for low-, middle- and high-income countries for aggregate products.

Cross-Price Elasticities of Demand Across 114 Countries

These aggregate products include:

  • Food, beverages, and tobacco;
  • Clothing and footwear;
  • Education;
  • Gross rent, fuel, and power;
  • House furnishings and operations;
  • Medical care;
  • Recreation;
  • Transport and communications; and
  • Other items.

The elasticities of demand in Cross-Price Elasticities of Demand Across 114 Countries were used to forecast food consumption in an international context in the following ERS report:

Global Drivers of Agricultural Demand and Supply

By the end of this section, you will be able to:

  • Calculate the price elasticity of demand
  • Calculate the price elasticity of supply

Both the demand and supply curve show the relationship between price and the number of units demanded or supplied. Price elasticity is the ratio between the percentage change in the quantity demanded (Qd) or supplied (Qs) and the corresponding percent change in price. The price elasticity of demand is the percentage change in the quantity demanded of a good or service divided by the percentage change in the price. The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price.

Elasticities can be usefully divided into three broad categories: elastic, inelastic, and unitary. An elastic demand or elastic supply is one in which the elasticity is greater than one, indicating a high responsiveness to changes in price. Elasticities that are less than one indicate low responsiveness to price changes and correspond to inelastic demand or inelastic supply. Unitary elasticities indicate proportional responsiveness of either demand or supply, as summarized in Table 1.

If . . . Then . . . And It Is Called . . .
[latex]\%\;change\;in\;quantity > \%\;change\;in\;price[/latex] [latex]\frac{\%\;change\;in\;quantity}{\%\;change\;in\;price)} > 1[/latex] Elastic
[latex]\%\;change\;in\;quantity = \%\;change\;in\;price[/latex] [latex]\frac{\%\;change\;in\;quantity}{\%\;change\;in\;price)} = 1[/latex] Unitary
[latex]\%\;change\;in\;quantity < \%\;change\;in\;price[/latex] [latex]\frac{\%\;change\;in\;quantity}{\%\;change\;in\;price)} < 1[/latex] Inelastic
Table 1. Elastic, Inelastic, and Unitary: Three Cases of Elasticity

Before we get into the nitty gritty of elasticity, enjoy this article on elasticity and ticket prices at the Super Bowl.


When the percentage change in quantity demanded is exactly equal to the percentage change in the price demand is?

To calculate elasticity, instead of using simple percentage changes in quantity and price, economists use the average percent change in both quantity and price. This is called the Midpoint Method for Elasticity, and is represented in the following equations:

[latex]\begin{array}{r @{{}={}} l}\%\;change\;in\;quantity & \frac { { Q }_{ 2 }-{ Q }_{ 1 } }{ ({ Q }_{ 2 }+{ Q }_{ 1 })/2 } \times 100 \\[1em] \%\;change\;in\;price & \frac { { P }_{ 2 }-{ P }_{ 1 } }{ ({ P }_{ 2 }+{ P }_{ 1 })/2 } \times 100 \end{array}[/latex]

The advantage of the is Midpoint Method is that one obtains the same elasticity between two price points whether there is a price increase or decrease. This is because the formula uses the same base for both cases.

Let’s calculate the elasticity between points A and B and between points G and H shown in Figure 1.

When the percentage change in quantity demanded is exactly equal to the percentage change in the price demand is?
Figure 1. Calculating the Price Elasticity of Demand. The price elasticity of demand is calculated as the percentage change in quantity divided by the percentage change in price.

First, apply the formula to calculate the elasticity as price decreases from $70 at point B to $60 at point A:

[latex]\begin{array}{r @{{}={}} l}\%\;change\;in\;quantity & \frac { { 3,000 }-{ 2,800 } }{ ({ 3,000 }+{ 2,800 })/2 } \times 100 \\[1em] & \frac { 200 }{ 2,900 } \times 100 \\[1em] & = 6.9 \\[1em] \%\;change\;in\;price & \frac { { 60 }-{ 70 } }{ ({ 60 }+{ 70 })/2 } \times 100 \\[1em] & \frac { -10 }{ 65 } \times 100 \\[1em] & -15.4 \\[1em] Price\;Elasticity\;of\;Demand & \frac { 6.9\% }{ -15.4\% } \\[1em] & 0.45 \end{array}[/latex]

Therefore, the elasticity of demand between these two points is [latex]\frac { 6.9\% }{ -15.4\% }[/latex] which is 0.45, an amount smaller than one, showing that the demand is inelastic in this interval. Price elasticities of demand are always negative since price and quantity demanded always move in opposite directions (on the demand curve). By convention, we always talk about elasticities as positive numbers. So mathematically, we take the absolute value of the result. We will ignore this detail from now on, while remembering to interpret elasticities as positive numbers.

This means that, along the demand curve between point B and A, if the price changes by 1%, the quantity demanded will change by 0.45%. A change in the price will result in a smaller percentage change in the quantity demanded. For example, a 10% increase in the price will result in only a 4.5% decrease in quantity demanded. A 10% decrease in the price will result in only a 4.5% increase in the quantity demanded. Price elasticities of demand are negative numbers indicating that the demand curve is downward sloping, but are read as absolute values. The following Work It Out feature will walk you through calculating the price elasticity of demand.

Calculate the price elasticity of demand using the data in Figure 1 for an increase in price from G to H. Has the elasticity increased or decreased?

Step 1. We know that:

[latex]Price\;Elasticity\;of\;Demand = \frac { \%\;change\;in\;quantity }{ \%\;change\;in\;price }[/latex]

Step 2. From the Midpoint Formula we know that:

[latex]\begin{array}{r @{{}={}} l}\%\;change\;in\;quantity & \frac { { Q }_{ 2 }-{ Q }_{ 1 } }{ ({ Q }_{ 2 }+{ Q }_{ 1 })/2 } \times 100 \\[1em] \%\;change\;in\;price & \frac { { P }_{ 2 }-{ P }_{ 1 } }{ ({ P }_{ 2 }+{ P }_{ 1 })/2 } \times 100 \end{array}[/latex]

Step 3. So we can use the values provided in the figure in each equation:

[latex]\begin{array}{r @{{}={}} l}\%\;change\;in\;quantity & \frac { { 1,600 }-{ 1,800 } }{ ({ 1,600 }+{ 1,800 })/2 } \times 100 \\[1em] & \frac { -200 }{ 1,700 } \times 100 \\[1em] & -11.76 \\[1em] \%\;change\;in\;price & \frac { { 130 }-{ 120 } }{ ({ 130 }+{ 120 })/2 } \times 100 \\[1em] & \frac { 10 }{ 125 } \times 100 \\[1em] & 8.0 \end{array}[/latex]

Step 4. Then, those values can be used to determine the price elasticity of demand:

[latex]\begin{array}{r @{{}={}} l}Price\;Elasticity\;of\;Demand & \frac { \%\;change\;in\;quantity }{ \%\;change\;in\;price } \\[1em] & \frac { -11.76 }{ 8 } \\[1em] & 1.47 \end{array}[/latex]

Therefore, the elasticity of demand from G to H 1.47. The magnitude of the elasticity has increased (in absolute value) as we moved up along the demand curve from points A to B. Recall that the elasticity between these two points was 0.45. Demand was inelastic between points A and B and elastic between points G and H. This shows us that price elasticity of demand changes at different points along a straight-line demand curve.

Assume that an apartment rents for $650 per month and at that price 10,000 units are rented as shown in Figure 2. When the price increases to $700 per month, 13,000 units are supplied into the market. By what percentage does apartment supply increase? What is the price sensitivity?

When the percentage change in quantity demanded is exactly equal to the percentage change in the price demand is?
Figure 2. Price Elasticity of Supply. The price elasticity of supply is calculated as the percentage change in quantity divided by the percentage change in price.

Using the Midpoint Method,

[latex]\begin{array}{r @{{}={}} l}\%\;change\;in\;quantity & \frac { { 13,000 }-{ 10,000 } }{ ({ 13,000 }+{ 10,000 })/2 } \times 100 \\[1em] & \frac { 3,000 }{ 11,500 } \times 100 \\[1em] & 26.1 \\[1em] \%\;change\;in\;price & \frac { { \$700 }-{ \$650 } }{ ({ \$700 }+{ \$650 })/2 } \times 100 \\[1em] & \frac { 50 }{ 675 } \times 100 \\[1em] & 7.4 \\[1em] Price\;Elasticity\;of\;Demand & \frac { 26.1\% }{ 7.4\% } \\[1em] & 3.53 \end{array}[/latex]

Again, as with the elasticity of demand, the elasticity of supply is not followed by any units. Elasticity is a ratio of one percentage change to another percentage change—nothing more—and is read as an absolute value. In this case, a 1% rise in price causes an increase in quantity supplied of 3.5%. The greater than one elasticity of supply means that the percentage change in quantity supplied will be greater than a one percent price change. If you're starting to wonder if the concept of slope fits into this calculation, read the following Clear It Up box.

It is a common mistake to confuse the slope of either the supply or demand curve with its elasticity. The slope is the rate of change in units along the curve, or the rise/run (change in y over the change in x). For example, in Figure 1, each point shown on the demand curve, price drops by $10 and the number of units demanded increases by 200. So the slope is –10/200 along the entire demand curve and does not change. The price elasticity, however, changes along the curve. Elasticity between points A and B was 0.45 and increased to 1.47 between points G and H. Elasticity is the percentage change, which is a different calculation from the slope and has a different meaning.

When we are at the upper end of a demand curve, where price is high and the quantity demanded is low, a small change in the quantity demanded, even in, say, one unit, is pretty big in percentage terms. A change in price of, say, a dollar, is going to be much less important in percentage terms than it would have been at the bottom of the demand curve. Likewise, at the bottom of the demand curve, that one unit change when the quantity demanded is high will be small as a percentage.

So, at one end of the demand curve, where we have a large percentage change in quantity demanded over a small percentage change in price, the elasticity value would be high, or demand would be relatively elastic. Even with the same change in the price and the same change in the quantity demanded, at the other end of the demand curve the quantity is much higher, and the price is much lower, so the percentage change in quantity demanded is smaller and the percentage change in price is much higher. That means at the bottom of the curve we'd have a small numerator over a large denominator, so the elasticity measure would be much lower, or inelastic.

As we move along the demand curve, the values for quantity and price go up or down, depending on which way we are moving, so the percentages for, say, a $1 difference in price or a one unit difference in quantity, will change as well, which means the ratios of those percentages will change.

Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It is computed as the percentage change in quantity demanded (or supplied) divided by the percentage change in price. Elasticity can be described as elastic (or very responsive), unit elastic, or inelastic (not very responsive). Elastic demand or supply curves indicate that quantity demanded or supplied respond to price changes in a greater than proportional manner. An inelastic demand or supply curve is one where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied. A unitary elasticity means that a given percentage change in price leads to an equal percentage change in quantity demanded or supplied.

Self-Check Questions

  1. From the data shown in Table 2 about demand for smart phones, calculate the price elasticity of demand from: point B to point C, point D to point E, and point G to point H. Classify the elasticity at each point as elastic, inelastic, or unit elastic.
    Points P Q
    A 60 3,000
    B 70 2,800
    C 80 2,600
    D 90 2,400
    E 100 2,200
    F 110 2,000
    G 120 1,800
    H 130 1,600
    Table 2.
  2. From the data shown in Table 3 about supply of alarm clocks, calculate the price elasticity of supply from: point J to point K, point L to point M, and point N to point P. Classify the elasticity at each point as elastic, inelastic, or unit elastic.
    Point Price Quantity Supplied
    J $8 50
    K $9 70
    L $10 80
    M $11 88
    N $12 95
    P $13 100
    Table 3.

Review Questions

  1. What is the formula for calculating elasticity?
  2. What is the price elasticity of demand? Can you explain it in your own words?
  3. What is the price elasticity of supply? Can you explain it in your own words?

Critical Thinking Questions

  1. Transatlantic air travel in business class has an estimated elasticity of demand of 0.40 less than transatlantic air travel in economy class, with an estimated price elasticity of 0.62. Why do you think this is the case?
  2. What is the relationship between price elasticity and position on the demand curve? For example, as you move up the demand curve to higher prices and lower quantities, what happens to the measured elasticity? How would you explain that?

Problems

  1. The equation for a demand curve is P = 48 – 3Q. What is the elasticity in moving from a quantity of 5 to a quantity of 6?
  2. The equation for a demand curve is P = 2/Q. What is the elasticity of demand as price falls from 5 to 4? What is the elasticity of demand as the price falls from 9 to 8? Would you expect these answers to be the same?
  3. The equation for a supply curve is 4P = Q. What is the elasticity of supply as price rises from 3 to 4? What is the elasticity of supply as the price rises from 7 to 8? Would you expect these answers to be the same?
  4. The equation for a supply curve is P = 3Q – 8. What is the elasticity in moving from a price of 4 to a price of 7?

elastic demand when the elasticity of demand is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price elastic supply when the elasticity of either supply is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price elasticity an economics concept that measures responsiveness of one variable to changes in another variable inelastic demand when the elasticity of demand is less than one, indicating that a 1 percent increase in price paid by the consumer leads to less than a 1 percent change in purchases (and vice versa); this indicates a low responsiveness by consumers to price changes inelastic supply when the elasticity of supply is less than one, indicating that a 1 percent increase in price paid to the firm will result in a less than 1 percent increase in production by the firm; this indicates a low responsiveness of the firm to price increases (and vice versa if prices drop) price elasticity the relationship between the percent change in price resulting in a corresponding percentage change in the quantity demanded or supplied price elasticity of demand percentage change in the quantity demanded of a good or service divided the percentage change in price price elasticity of supply percentage change in the quantity supplied divided by the percentage change in price unitary elasticity when the calculated elasticity is equal to one indicating that a change in the price of the good or service results in a proportional change in the quantity demanded or supplied