# Chap_05 - Elasticity. x is a measure of how responsive...

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ELASTICITY AND ITS APPLICATION Elasticity . . . … is a measure of how responsive buyers and sellers are to changes in market conditions

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ELASTICITY AND ITS APPLICATION Price Elasticity of Demand Price elasticity of demand is the percentage change in quantity demanded given a percent change in the price. It is a measure of how much the quantity demanded of a good responds to a change in the price of that good.
You design websites for local businesses. You charge \$200 per website, and currently sell 12 websites per month. Your costs are rising (including the opportunity cost of your time), so you consider raising the price to \$250. The law of demand says that you won’t sell as many websites if you raise your price. How many fewer websites? How much will your revenue fall, or might it increase? A scenario… 0 3

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ELASTICITY AND ITS APPLICATION 4 Elasticity Basic idea: Elasticity measures how much one variable responds to changes in another variable. One type of elasticity measures how much demand for your websites will fall if you raise your price. Definition: Elasticity is a numerical measure of the responsiveness of Q d or Q s to one of its determinants. 0
ELASTICITY AND ITS APPLICATION 5 Price Elasticity of Demand Price elasticity of demand measures how much Q d responds to a change in P . Price elasticity of demand = Percentage change in Q d Percentage change in P Loosely speaking, it measures the price- sensitivity of buyers’ demand. 0

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ELASTICITY AND ITS APPLICATION 6 Price Elasticity of Demand Price elasticity of demand equals 0 P Q D Q 2 P 2 P 1 Q 1 P rises by 10% Q falls by 15% 15% 10% = 1.5 Price elasticity of demand = Percentage change in Q d Percentage change in P Example:
ELASTICITY AND ITS APPLICATION 7 Price Elasticity of Demand Along a D curve, P and Q move in opposite directions, which would make price elasticity negative. We will drop the minus sign and report all price elasticities as positive numbers. 0 P Q D Q 2 P 2 P 1 Q 1 Price elasticity of demand = Percentage change in Q d Percentage change in P

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ELASTICITY AND ITS APPLICATION 8 Calculating Percentage Changes 0 P Q D \$250 8 B \$200 12 A Demand for your websites Standard method of computing the percentage (%) change: end value – start value start value x 100% Going from A to B, the % change in P equals (\$250–\$200)/\$200 = 25%
ELASTICITY AND ITS APPLICATION 9 Calculating Percentage Changes 0 P Q D \$250 8 B \$200 12 A Demand for your websites Problem : The standard method gives different answers depending on where you start. From A to B, P rises 25%, Q falls 33%, elasticity = 33/25 = 1.33 From B to A, P falls 20%, Q rises 50%, elasticity = 50/20 = 2.50

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10 Calculating Percentage Changes So, we instead use the midpoint method : 0 end value – start value midpoint x 100% The midpoint is the number halfway between the start & end values, the average of those values. It doesn’t matter which value you use as the
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## This note was uploaded on 04/20/2011 for the course ECON 130 taught by Professor Kikuchi,g during the Fall '08 term at University of Hawaii, Manoa.

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Chap_05 - Elasticity. x is a measure of how responsive...

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