Economics, 3rd Edition

FIGURE 4.12

F

F

F

F

IG

IG

IG

IG

U

U

U

U

R

R

R

R

E

E

E

E

4

4

4

1

1

.1

2

2

2

FIGURE 4.12

Quantity

D

1

: 

P = 20 – 5Q 

 

1

2

3

4

5

6

5

10

25

30

20

15

∆Q

∆P

 

Price (

€)

---

92  PART 2  SUPPLY AND DEMAND: HOW MARKETS WORK

It is useful to remember that 

given an elasticity figure we can 

calculate the expected change in 

demand as a result of a change 

in price. For example, if the price 

elasticity of demand (ped) is given 

as  0.6 then an increase in price 

of  5 per cent will result in a fall in 

quantity demanded of 3 per cent. 

By using the inverse of the elasti-

city equation, for any given value 

of price elasticity of demand we 

can calculate how much of a price 

change is required to bring about a 

desired change in quantity deman-

ded. Suppose that a government 

wanted to reduce the demand for 

motor vehicles as part of a policy 

to reduce congestion and pollu-

tion. What sort of price change 

might be required to bring about a 

10 per cent fall in demand?

Assume that the price elasticity 

of demand for motor vehicles is 0.8.  

The inverse of the basic elasticity 

formula is:

1

ped

=