LECTURE 11
ELASTICITY OF DEMAND
Reviewing the last lecture, I drew Dr. Filer's demand curve for candy bars,
and asked you to calculate the coefficient of elasticity of demand over the
price range of $.80 per bar to $.70 per bar.
Recall the formula for the
calculation of the coefficient of elasticity of demand.
e
d
=
[(P1 + P2) / (Q1 + Q2)] x (EQ/EP)
Equation 104
At a price of $.80 each, I purchase 2 bars per day.
At a price of $.70 each, I
purchase 3 bars per day.
Plugging these numbers into our formula for the
coefficient of elasticity of demand:
[(.80 + .70) / (2 + 3)] x (1 / .10)
=
3.
This was the calculation that we did in class towards the end of Lecture 10.
Because the coefficient was greater then 1, we concluded that demand was
elastic.
As such, price and total revenue should move in opposite directions.
When the price is $.80 per bar, I buy two bars per day.
Total revenue to the
seller from my purchase:
$1.60.
When the price
falls
to $.70 per bar, I
purchase 3 per day, and the total revenue to the seller from my purchase
rises
to $2.10.
If price falls and total revenue increases, demand is elastic.
I ended Lecture 10 by asking you to check my work, and we calculated the
coefficient of elasticity of demand for candy over a price change from $.60 per
bar to $.40 per bar, and over the price change from $.30 per bar to $.10 per
bar.
When we did this, you noticed something strange.
Remember:
"PoverQdQdP":
At a price of $.60 each, I purchase 4 bars per day.
At a price of $.40 each, I
purchase 6 bars per day.
Plugging these numbers into our formula for the
coefficient of elasticity of demand:
[(.60 + .40) / (4 + 6)] x (2 / .20)
=
1.
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View Full DocumentAt a price of $.10 each, I purchase 9 bars per day.
At a price of $.30 each, I
purchase 7 bars per day.
Plugging these numbers into our formula for the
coefficient of elasticity of demand:
[(.10 + .30) / (9 + 7)] x (2 / .20)
=
1/4.
Rather than my elasticity of demand for candy bars holding steady at a
coefficient of 3, implying that I have an elastic demand for candy bars, we
calculated, from my single demand curve, that I exhibit not only an elastic
demand for candy bars, but an inelastic demand for candy, as well as a
unitaryelastic demand for candy bars.
How can this be?
Look at Figure 111.
It turns out that a straightline demand curve does not
exhibit a constant coefficient of elasticity of demand at all points on the
demand curve.
THE COEFFICIENT OF ELASTICITY OF DEMAND AT THE MIDPOINT OF
A STRAIGHTLINE DEMAND CURVE IS 1 (IN ABSOLUTE VALUE).
THE
COEFFICIENT OF ELASTICITY OF DEMAND ANYWHERE ON THE
DEMAND CURVE ABOVE THE MIDPOINT WILL BE GREATER THAN
ONE:
DEMAND WILL BE ELASTIC.
THE COEFFICIENT OF ELASTICITY
OF DEMAND ANYWHERE ON THE DEMAND CURVE BELOW THE MID
POINT WILL BE A FRACTION LESS THAN ONE:
DEMAND WILL BE
INELASTIC.
On a straightline demand curve, the coefficient of elasticity of demand near
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 Spring '07
 nancy
 Supply And Demand

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