Defining and Measuring Elasticity

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Presentation transcript:

Defining and Measuring Elasticity AP Economics Mr. Bernstein Module 46 (pp 460-464 only): Defining and Measuring Elasticity October 2017

AP Economics Mr. Bernstein Definition of Elasticity Applies to the relationship between any two variables, such as price and quantity demanded The Law of Demand states there is an inverse relationship between price and quantity demanded Elasticity measures the responsiveness – ie we know the quantity demanded decreases when prices increase, but by how much? Examples: Gas doubles in price - what will be the effect on driving? The price of pens double - will this change your writing habits?

AP Economics Mr. Bernstein Definition of Elasticity, cont. % change in the independent variable / % change in the dependent variable (…the y axis!) Aka %rind / %rdep Price Elasticity of Demand is % change in Quantity Demanded / % change in Price Aka Ed = %rQd / %rP

AP Economics Mr. Bernstein The Midpoint Formula Problem: Using Ed = %rQd / %rP formula, the Elasticity of Demand calculations will change if the starting and ending points are reversed!! Example: If price rises from 100 to 110, this is 10% increase. If price drops from 110 to 100, this is 9.1% decrease Solution: Use the Midpoint Formula

AP Economics Mr. Bernstein The Midpoint Formula %rP = 100*(New Price – Old Price) / Average Price %rQd = 100*(New Quantity Demanded – Old Quantity Demanded) / Average Quantity Demanded Example: Rutgers raises tuition from $20,000 to $24,000 per year. The number of new freshman declines from 10,000 to 8,000. How elastic is demand? %rP = 100*(20,000-24,000)/22,000 = 18 and %rQd = 100*(10,000-8,000)/9,000 = 22 Ed = 22 / 18, or 1.22, an elastic response between the two points on the demand curve Without Midpoint Formula, Ed = 20/20, or 1.0 (unit elastic)