1. What effect does a change in price have on the quantity demanded?

2. Elasticity of demand is the response to price change for different goods

3. How do different goods respond to being dropped?
An anology

4. DROP A SOCCER BALL ?
GOOD RESPONSE
ELASTIC

5. BUT, DROP A FORK LIFT ?
NOT MUCH RESPONSE
INELASTIC

6. If the response of quantity demanded to a price change is proportional
It’s called
unit elastic

7. Suppose gas cost $3.00 a gallon
But now it’s $3.50 (3/3.5=.857)
.5/{6.5/2} = .5/3.25 = .15 or 15%
If you had previously bought 40 gallons a week, about how many would you purchase if gas is unit elastic?
.857 X 30 = 25.71
30 – = 4.29
4.29/{55.71/2} = 4.29/27.85 =.15

8. Qualities that affect Elasticity of Demand
Substitutability
Proportion of income spent on product
Luxury or necessity?
Habit-forming?
Time

9. Elasticity coefficients
εd = percentage change in quantity demanded
percentage change in price
Hot tip !!!
To solve for Percentage Change:
The new less the old by
“the old plus the new, divided by two”

10. MIDPOINT OR Arc METHOD
∆ Q
εd = (Q+Q1)/2 ∆P
(P+P1)/2

11. example Price X quantity = total revenue $10 X 10 = $100
εd = (10+12)/2 = = = elastic =
(10+9)/2 = 9.5
{2 X 9.5} = = 1.8
{11 x 1} = 11

12. Quick quiz: What the coefficients mean
εd > 1
εd < 1
εd = 1
Elastic
Inelastic
Unit Elastic

13. Summarizing Price Elasticity of Demand
Elasticity Coefficient
Term
Description
Impact on TR of price increase
Impact on TR of price decrease
Greater than 1
εd > 1
Elastic
Quantity demanded changes by a larger percentage than does price
Total revenue decreases
Total revenue increases
Equal to 1 εd = 1
Unit
Quantity demanded changes by the same percentage as does price
Total revenue unchanged
Proportion
proportion
Less than 1 εd < 1
Inelastic
Quantity demanded changes by a smaller percentage than does price