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THE UNIVERSITY OF BRITISH COLUMBIA
1. Elasticity
2. Where do Demand Curves Come From
3. Using Regression Analysis to Estimate Demand
4. Assessing Apple’s Pricing Decision
5. Summary and Next Class
Managerial Economics
Class 3 –Thursday, Sept. 16
THE UNIVERSITY OF BRITISH COLUMBIA
Elasticity
The price elasticity of demand,
ε
, is the percentage change in quantity
divided by the percentage change in price.
ε
= %
Δ
Q/%
Δ
p
The arc price elasticity is the elasticity calculated as a movement between two points
on the demand curve.
The point (price) elasticity is the elasticity “at a point”  the limit of the arc elasticity
as the two points get closer and closer together.
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THE UNIVERSITY OF BRITISH COLUMBIA
Clicker Question 1: Arc Elasticity
Suppose that the price of avocados falls from $2.10 to $1.90 and the quantity
demanded rises from 90 to 110. What is the arc price elasticity of demand for this
change in price?
a.
1
b. 1.5
c.
2
d. It varies from 1.5 to 2.5
e.
none of the above
THE UNIVERSITY OF BRITISH COLUMBIA
Elastic and Inelastic Demand
If the price elasticity of demand is more than 1 in absolute value (like 1.5)
we say demand is elastic.
If the price elasticity of demand is less than 1 in absolute value (like
0.5)
we say is inelastic.
If the elasticity = 1 we say demand has unitary elasticity. It is neither elastic
nor inelastic.
The elasticity equation is
ε
= %
Δ
Q/%
Δ
p.
This equation can be rewritten as %
Δ
Q =
ε
%
Δ
p.
Thus the percentage change in quantity is larger in absolute value than
the percentage change in price if demand is elastic (if
ε
is bigger than 1
in absolute value).
3
THE UNIVERSITY OF BRITISH COLUMBIA
Point Elasticity
The elasticity is:
This can be rewritten as
Qp
pQ
%
%
Q
p
The point elasticity is the elasticity at a point. It is the limit of the arc
elasticity as the underlying change in price gets smaller and smaller and
approaches zero. The limit of
Δ
Q
/
Δ
p
as
Δ
p
approaches zero is the derivative
dQ/dp
.
Therefore, the point elasticity is
dQ p
dp Q
THE UNIVERSITY OF BRITISH COLUMBIA
Elasticity Along a Linear Demand
Curve
The Elasticity Varies Along the Linear Demand Curve.
The higher the price, the more elastic the demand curve (
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This note was uploaded on 01/19/2011 for the course COMMERCE 290 taught by Professor Brianogram during the Spring '09 term at The University of British Columbia.
 Spring '09
 BRIANOGRAM

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