Elasticity of Demand Part II Chapter 5

Variety of Demand Curves Perfectly Inelastic Quantity demanded does not respond to price changes Ed = 0 Perfectly Elastic Quantity demanded changes infinitely with price change Ed = ∞ Unit Elastic Quantity demanded changes by the same percentage as price D1 D1

Slope versus Elasticity Price elasticity of demand is closely related to slope of a demand curve---but it is not the same! The Slope of a linear demand curve is constant Elasticity changes at each point on line All linear demand curves have elastic, unit elastic & inelastic points on the line

Calculating Elasticity (simple method) % ∆ Qty D Ed = -------------- . % ∆ P Prices rises from $200 to $220 Price B $220 (8 – 10) A $200 D1 Ed > 1 => demand is Price Elastic 8 10 Quantity

Problems with the Simple Elasticity Calculation The simple % method leads to different results based on the direction of the quantity change #1) Qty Falls 10 → 8 #2) Qty Rises 8 → 10 (8 – 10) ( . ) 10 8 100 2 00 20 25% 9% 2.7 - 8) ´ - =

Mid-Point Method The mid-point method achieves the same elasticity calculation regardless of direction of price change Use the mid-point formula for all test calculations: %∆ in Qty = ∆ Q/[(Q1 + Q2)/2] --------------- ------------------------- % ∆ in Price = ∆ P/[(P1 + P2)/2] 2 . (10+8)/2 22% ------------------ = ----- = 2.3 .2 . 9.5% (2.2+2)/2

Elasticity of Demand Practice Test