Ch. 4 Elasticity
Price Elasticity of Demand

Price of elasticity of demand
: a unitsfree measure of the responsiveness of the
quantity demanded of a good to a change in its price when all other influences on
buyers’ plans remain the same.

Calculating Price Elasticity of Demand
o
Price elasticity of demand = Percentage change in quantity demanded
Percentage change in price
o
To use this formula, we need to know the quantities demanded at different
prices when all other influences on buyers’ plans remain the same.
o
Express the changes in price and quantity demanded as percentages of the
average price
and the
average quantity
. By using the avg price and avg
quantity, we calculate elasticity at a point on the demand curve midway
between the original point and the new point.
o
Percentage change in quantity demanded = change in Q/ avg Q
o
Percentage change in price = change in P/ avg P
o
We use average price and average quantity because it gives the most precise
measurement of elasticity. Thus, we get the same value for the elasticity
regardless of whether the price rises or falls the same amount.

Elasticity is the ratio of two percentage changes.

Elasticity is a unitsfree measure because the percentage change in each variable is
independent of the units in which the variable is measured. The ratio of two
percentages is a number without units.

When the price of a good rises, the quantity demanded decreases along the demand
curve. Because a positive change in price brings a negative change in the quantity
demanded, the price elasticity of demand is a negative number. But it is the
magnitude, or absolute value, of the price elasticity of demand that tells us how
responsive – how elastic – demand is.

Perfectly inelastic demand
: The quantity demanded remains constant when the price
changes; the price elasticity of demand is zero. Graph: Vertical line. Ex: Insulin.

Unit elastic demand
: The percentage change in the quantity demanded equals the
percentage change in price; the price elasticity equals 1. Graph: Hyperbolic Curve in
First Quadrant

Between perfectly inelastic demand and unit elastic demand, the general case is in
which the percentage change in the quantity demanded is less than the percentage
change in price; the price elasticity of demand is between zero and 1. The good has
inelastic demand
: Ex: Food and housing

Perfectly elastic demand
: The quantity demanded changes by an infinitely large
percentage in response to a tiny price change; the price elasticity of demand is
infinite. Ex: Same products, same price, sidebyside

Between unit elastic demand and perfectly elastic demand, in which the percentage
change in quantity demanded exceeds the percentage change in price, the price
elasticity of demand is greater than 1 and the good is said to have an
elastic demand
.
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 Spring '08
 LEACHMAN
 Price Elasticity, Supply And Demand, 1%, 1 %

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