5
Ch. 5 
Elasticity
Instructor:Dr. Fred Aswani
What happens to the quantity demanded when the price of a
good changes?
IF quantity changes a lot, we say that demand is
elastic
(= quantity stretches a lot)
If quantity changes a little, demand is
inelastic
(= quantity does not stretch much)
How do we compute a lot versus a little ?
Price elasticity of demand
=
% change in quantity demanded
/
% change in price
=
%Δ Q
D
/
%Δ P
(Holding everything else constantIncome, tastes, prices of
other goods...)
Possible Values: ( See Figure 5  1)
Ch. 5 Pg. 1
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Ranges between 0 and infinity
When 0
#
E < 1, demand is inelastic
When E > 1, demand is elastic
When E = 1, demand is unit elastic
When E = 0, perfectly inelastic
When E =
4
,
perfectly elastic
(Note that although price and quantity demanded move in
the opposite directions, by convention elasticity is positive)
We consider the absolute value.
Ex:
if the price of gas goes up by 50%, and the quantity
demanded falls by 10%, then the elasticity of demand is :

10% / +50%
=
0.2
demand for gasoline is inelastic since it is less than
one.
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 Spring '08
 HannahHolmes
 Price Elasticity, Supply And Demand, close substitutes

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