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Elasticity
Elasticity
Q2 Q1
x 100%
% Qd (Q1 Q2 ) / 2
% P P2 P1
x 100%
( P1 P2 ) / 2
10 5 5
x 100% x 100%
% Qd (5 10) / 2 7 .5 66.7%
= 167
.
% P 2 3 -1 -40.0%
x 100% x 100%
( 3 2) / 2 2.5
Price Elasticity of Demand Using
Midpoint Method
• Generalize the price elasticity formula
– If the price drops from p to p’, other things
constant, the quantity demanded increases
from q to q’
– The change in price can be represented as Δp
and the change in quantity as Δq
q
(q q) / 2
ED
p
(p p) / 2
Price Elasticity of Demand
18 and 90,
c
respectively. 4 d
2
Ep = (-10/18)/(2/8) = -2.22 D
8 18 80 90 Q
Ep = (-10/90)/(2/2) = -.11
Arc Elasticity
Type of Substitutes
Elasticity Available
Elastic Many
Inelastic Few
Price Elasticity of Demand
• Elasticity of Demand with respect to the good’s
own price
• EDxPx= %ΔQ/%ΔP or
• EDxPx= ΔQ/Q / ΔP/P or
• EDxPx= ΔQ/ΔP • P/Q
• For price elasticities of demand the sign is
ignored as they are all negative
• Elastic demand > 1
• Inelastic demand < 1
• Unit elastic demand = 1
Calculating Percentage Changes
• Elasticity is a ratio of percentages, and it
involves computing percentage changes.
P2 P1
% change in price x 100%
P1
Q2 Q1
% change in quantity demanded x 100%
Q1
P D
Elasticity = 0
Q
P
D
Elasticity =
Q
P
Elasticity = 1
D Q
Price Elasticity of Demand Over
an Arc
Px ($)
If measuring price elasticity
of demand over an arc use
15 the average P and Q
12.5 5
10
100 Dx
200 Qx
100
150 (Kgs)
EDxPx= 100/150 / 5/12.5 = .66/.4 = 1.66
EDxPx= 100/5 x 12.5/150 = 20 x .083 = 1.66
Price Elasticity of Demand at a
Point
EDxPx= ΔQ/ΔP • P/Q
D
20 50 Q
Price Elasticity Along a Straight
Line Demand Curve
P
EDxPx > 1 Slope = 2/3
200
Inverse of slope = 1.5
100 EDxPx = 1
EDxPx < 1
150 300 Q
a E =-3.49
10 b
Note that between points "a" 8
and "b" the (arc) elasticity of
the above demand curve is -
3.49, whereas between "c" and c E = -.17
4 d
"d" it is -.17. 2 D
8 18 80 90
Elasticity Changes along a
Straight-Line Demand Curve
6.4 • Along the elastic
range, elasticity
values are greater
than one.
.29
• Along the inelastic range,
elasticity values are less
than one.
Elasticity and Total Revenue
• Knowledge of price elasticity is especially
valuable because it indicates the effect of
a price change on total revenue
TR TR
rising falling
Q
TR 0 = 220 x 120 = 26,400
220
180
0 Q
120 140 200
Important Observations
• EDxI= %ΔQX/%ΔI or
• EDxI= ΔQX/QX / ΔI/I or
• EDxI= ΔQX/ΔI • I/QX
• Categories
– Goods with income elasticities less than zero
are called inferior goods demand declines
when income increases
Income Elasticity of
Demand
– Normal goods have income elasticities greater
than zero demand increases when income
increases
• Normal goods with income elasticities
greater than zero but less than 1 are called
income inelastic goods demand
increases but not as much as does income
P S
50
10
40
100
100 200 Q
Price of
Wheat 1. When demand is inelastic,
2. . . . leads an increase in supply . . .
to a large fall S1
in price . . . S2
$3
Demand