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

2. 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?

3. 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

4. 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

5. 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)