Keat & Young: Managerial
Eco. Adapted by Dr. M. A.
Abdalla
1
Econ340: Topic # 3: Elasticity
Chapter 4
Demand Elasticity

Keat & Young: Managerial
Eco. Adapted by Dr. M. A.
Abdalla
2
Demand Elasticity
•
The Economic Concept of Elasticity
•
The Price Elasticity of Demand
•
The Cross-Elasticity of Demand
•
Income Elasticity
•
Other Elasticity Measures
•
Elasticity of Supply

Keat & Young: Managerial
Eco. Adapted by Dr. M. A.
Abdalla
3
The Economic Concept of Elasticity
•
The response of a change of a variable to
change in an other variable is measured by
elasticity.
•
Elasticity
: Mathematically elasticity is the
percentage change in one variable relative to a
percentage change in another.
B
in
change
percent
A
in
change
percent
Elasticity
of
t
Coefficien

Keat & Young: Managerial
Eco. Adapted by Dr. M. A.
Abdalla
4
The Price Elasticity of Demand
•
Price elasticity of demand
: The percentage
change in quantity demanded caused by
percentage change in price.
Price
%
Quantity
%
E
p

Keat & Young: Managerial
Eco. Adapted by Dr. M. A.
Abdalla
5
The Price Elasticity of Demand
•
If P
from 8 to7, E
P
= -0.8
•
If P
from 7 to 8, E
P
= -0.64
•
Value of E
P
is different
depending on direction of
change in P.
•
To solve this problem we use
Arc
elasticity
P
Qd
12
6
11
7
10
8
9
9
8
10
7
11
6
12
5
13

Keat & Young: Managerial
Eco. Adapted by Dr. M. A.
Abdalla
6
The Price Elasticity of Demand
•
Arc elasticity
: Elasticity which is measured
over a discrete interval of a demand (or a
supply) curve.
•
E
p
= Coefficient of arc price elasticity
•
Q
1
= Original quantity demanded
•
Q
2
= New quantity demanded
•
P
1
= Original price
•
P
2
= New price
2
/
)
(
2
/
)
(
2
1
1
2
2
1
1
2
P
P
P
P
Q
Q
Q
Q
E
p

Keat & Young: Managerial
Eco. Adapted by Dr. M. A.
Abdalla
7
The Price Elasticity of Demand
•
If P
from 7 to 8, or P
from 8 to7 E
P
= -0.714
•
But again there are two problems:
a.
Value of E
P
vary depending on the new price
distance from the initial (original) price.
b.
What if we want to measure Ep at a single point
rather than between two points.

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