This
** preview**
has intentionally

**sections.**

*blurred***to view the full version.**

*Sign up**This preview shows
pages
1–2. Sign up
to
view the full content.*

C h a p t e r 4 : E l a s t i c i t y
I.
Price Elasticity of Demand
A.
Figure 4.1 shows how the demand curve influences the price and quantity responses that result from
a given change in supply. The figure highlights the need for a measure of the responsiveness of the
quantity demanded to a price change.
B.
The
price elasticity of demand
is a units-free 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.
C.
Calculating Elasticity
1.
The price elasticity of demand is equal to
price
in
change
Percentage
demanded
quantity
in
change
Percentage
.
2.
To calculate the price elasticity of demand, we express the change in price as a percentage of the
average price—
the midpoint between the initial and new price
.
3.
Similarly we express the change in the quantity demanded as a percentage of the
average
quantity
demanded—the average of the initial and new quantity.
4.
Figure 4.2
shows what is needed to calculate the price elasticity of demand for pizza: The
percentage change in quantity demanded is %
∆
Q
, and the percentage change in price is %
∆
P
.
We calculate %
∆
Q
as
∆
Q
/
Q
ave
and we calculate %
∆
P
as
∆
P
/
P
ave
so we calculate the price
elasticity of demand as (
∆
Q
/
Q
ave
)/(
∆
P
/
P
ave
).
a)
By using the
average price
and
average quantity
, the elasticity is the same value whether
the price rises or falls.
b)
The ratio of two
proportionate
changes is the same as the ratio of two
percentage
changes.
The measure is “units-free” because it is a ratio of two percentage changes and the
percentages cancel out. Changing the units of measurement of price or quantity leave the
value of the elasticity the same.
c)
The demand elasticity formula yields a negative value, because price and quantity move in
opposite directions. However, it is the
magnitude
, or absolute value, of the measure that
reveals how responsive the quantity change has been to a price change. So we use the
magnitude or the absolute value of the price elasticity of demand.
D.
Inelastic and Elastic Demand
Demand can be inelastic, unit elastic, or elastic, and can range from zero to infinity.
1.

This
** preview**
has intentionally

This is the end of the preview. Sign up
to
access the rest of the document.

Ask a homework question
- tutors are online