Elasticity of Demand AG BM 102

Introduction Key question about demand is how responsive is consumption to a price change? The demand curve provides a quantitative answer But that answer is dependent on units of measurement Elasticity does not depend on units of measure!

Own Price Elasticity of Demand - the percentage change in quantity demanded in response to a one percent change in the price

An Example - Beef Price/lb.Quantity lb./cap. Price/lb.Quantity lb./cap. $5.0050$ $4.7555$ $4.5060$ $4.2565$ $4.0070$2.7595

Calculating the Equation for the Demand Curve Take any two points, such as $4.00 and 70 lb, and $3.00 and 90 lb. The equation for a straight line demand curve is Q = a + b P

To check put in Prices If P=3, Q = (3) = 90 If P=4, Q = (4) = 70

Formula for Demand Elasticity

Elasticity at P=$4.00 and Q=70 lbs.

Interpreting elasticity Inelastic elastic unitary elastic

Inelastic demand means quantity change is proportionately less than price change, or that demand is not especially price responsive – like drinking milk

Elastic demand means quantity change is proportionately more than price change, or that demand is particularly price responsive – like lobster

Another view of the formula

Note The units cancel out, so elasticity is not dependent on units used in the data For straight-line demand curves, the value of elasticity changes as you move along the curve The closer you are to the vertical access the more elastic demand The closer to the horizontal access the more inelastic

Some demand issues Is the demand for all food elastic or inelastic? Is the demand for all meat elastic or inelastic? Is the demand for chicken elastic or inelastic? Is the demand for prime rib elastic or inelastic?

Concluding comments Elasticity allows discussion of demand without units It makes description of demand curves more descriptive Makes analysis of changes easier