Elasticity
Consider 2 points on a short run demand curve. At a price of $5 the
quantity demanded is 20 and at a price of $6 the quantity
demanded is 15.
Calculating the percentage change in price: the change in price is
$1 and the original price is $5. The percentage change in price is
Change in price divided by the original level of price.
1/5=20/100=.2 or 20%
Calculating the percentage change in quantity: the change in
quantity demanded is 5 and the original quantity demanded is 20.
The percentage change in quantity is 5/20=25/100=.25 or 25%.
The formula for the ownprice elasticity of demand is
%change quantity/%change price.
In this case at a price of $5 and quantity 20, the elasticity of
demand is 25/20=125/100=1.25
If in the long run, the quantity demanded at a price of $5 remains
at 20, but at a price of $6 the quantity demanded is 10.
Then the percentage change in quantity is 10/20=50/100=.5 or
50%. The long run elasticity is then 50/20=250/100=2.5.
Notice that the long run elasticity of demand is greater (in absolute
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 Fall '07
 REAGAN
 Supply And Demand, $1, McDonald, $5, $6

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