AP Economics Mr. Bernstein Module 46 (pp only): Defining and Measuring Elasticity October 17, 2014

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 measure 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? 2

AP Economics Mr. Bernstein Definition of Elasticity, cont. % change in the dependent variable / % change in the independent variable Aka %  dep / %  ind Price Elasticity of Demand is % change in Quantity Demanded / % change in Price Aka E d = %  Q d / %  P 3

AP Economics Mr. Bernstein The Midpoint Formula Problem: Using E d = %  Q d / %  P 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 4

AP Economics Mr. Bernstein The Midpoint Formula %  P = 100*(New Price – Old Price) / Average Price %  Q d = 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? %  P = 100*(20,000-24,000)/22,000 = 18 and %  Q d = 100*(10,000-8,000)/9,000 = 22 E d = 18 / 22 or.81, an inelastic response between the two points on the demand curve Without Midpoint Formula, E d = 20/20, or 1.0 (unit elastic) 5