1. Elasticity of Demand Part II
Chapter 5

2. 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

4. 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

5. 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

6. 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) - =

7. 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)/ %
= = 2.3 %
(2.2+2)/2

8. Elasticity of Demand Practice Test