Elasticity • Percent change in one variable in response to a given percent change in another variable. Demand Elasticity
• Percentage change in quantity demanded, Q, in
response to given percentage change in the price, at a particular point on the demand. • Price Elasticity of demand ε How does the quantity demanded falls in response to 1% increase in Price?
1% increase in price leads to an ε% change in quantity demanded.
Elasticities along the Demand Curve
Where a liner demand
curve hits the quantity axis, On downward sloping If slope is constant ( where p is 0) increase in linear demand curve price does not affect quantity demanded.
1% increase in Price , Large
Higher Prices, the more -ve Percent fall in quantity elasticity of demand. demanded. Perfectly Inelastic
At a point where elasticity is 0.
Eg) inelastic steel rod.
Inelastic • For the quantities between the mid points of linear demand curve and lower end. Where Demand elasticity lies between • 0 and 1 : 0>ε>-1 • Eg) Piece of Rope that does not stretch much. • Changing Price has little effect. Unitary Elasticity • At mid point of linear demand curve • ε=-1 Elastic
• At prices higher than at mid point of demand curve,
• ε<-1 • Rubber band that stretches substantially when you stretch it. Perfectly elastic • when demand curve hits price axis, it is perfectly elastic.