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**What effect does a change in price have on the quantity demanded?**

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**Elasticity of demand is the response to price change for different goods**

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**How do different goods respond to being dropped?**

An anology

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DROP A SOCCER BALL ? GOOD RESPONSE ELASTIC

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BUT, DROP A FORK LIFT ? NOT MUCH RESPONSE INELASTIC

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**If the response of quantity demanded to a price change is proportional**

It’s called unit elastic

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**Suppose gas cost $3.00 a gallon**

But now it’s $3.50 (3/3.5=.857) .5/{6.5/2} = .5/3.25 = .15 or 15% If you had previously bought 40 gallons a week, about how many would you purchase if gas is unit elastic? .857 X 30 = 25.71 30 – = 4.29 4.29/{55.71/2} = 4.29/27.85 =.15

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**Qualities that affect Elasticity of Demand**

Substitutability Proportion of income spent on product Luxury or necessity? Habit-forming? Time

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**Elasticity coefficients**

εd = percentage change in quantity demanded percentage change in price Hot tip !!! To solve for Percentage Change: The new less the old by “the old plus the new, divided by two”

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MIDPOINT OR Arc METHOD ∆ Q εd = (Q+Q1)/2 ∆P (P+P1)/2

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**example Price X quantity = total revenue $10 X 10 = $100**

εd = (10+12)/2 = = = elastic = (10+9)/2 = 9.5 {2 X 9.5} = = 1.8 {11 x 1} = 11

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**Quick quiz: What the coefficients mean**

εd > 1 εd < 1 εd = 1 Elastic Inelastic Unit Elastic

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**Summarizing Price Elasticity of Demand**

Elasticity Coefficient Term Description Impact on TR of price increase Impact on TR of price decrease Greater than 1 εd > 1 Elastic Quantity demanded changes by a larger percentage than does price Total revenue decreases Total revenue increases Equal to 1 εd = 1 Unit Quantity demanded changes by the same percentage as does price Total revenue unchanged Proportion proportion Less than 1 εd < 1 Inelastic Quantity demanded changes by a smaller percentage than does price

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Elasticity 04 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Elasticity 04 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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