Lecture 8 - Econ 201 Lecture 8 Price Elasticity of Demand A...

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Econ 201 Lecture 8 Price Elasticity of Demand A measure of the responsiveness of quantity demanded to changes in price. Highly responsive = "elastic" Highly unresponsive = "inelastic" Price elasticity of demand = The percentage change in the quantity demanded that results from a one percent change in price. Example 8.1. If a 1 percent rise in the price of shelter caused a 2 percent reduction in the quantity of shelter demanded, the price elasticity of demand for shelter would be -2. The price elasticity of demand will always be negative (or zero) because price changes always move in the opposite direction from changes in quantity demanded. For convenience, we usually drop the negative sign and speak of price elasticities in absolute value terms. The demand for a good is said to be elastic with respect to price if its price elasticity is more than 1. The demand for a good is inelastic with respect to price if its price elasticity is less than 1. Demand is unit elastic with respect to price if its price elasticity is equal to 1. Inelastic Elastic Unit elastic 0 1 2 3 A more general formula for price elasticity: Let P = the current price of a good; Q = the quantity demanded at that price; Δ P = a small change in the current price and Δ Q = the resulting change in the quantity demanded Elasticity = percentage change in quantity / percentage change in price = ( Δ Q/Q)/( Δ P/P) A Geometric Interpretation of Price Elasticity Q P D Q P P- Δ P Q+ Δ Q Δ P Δ Q Elasticity = ( Δ Q/Q)/( Δ P/P) = ( Δ Q/ Δ P) (P/Q) Δ P/ Δ Q = the slope of the demand curve, so Δ Q/ Δ P = 1/slope. Elasticity = (P/Q)(1/slope) Example 8.2. Find the price elasticity of demand at point A on the demand curve below:
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2 Price Quantity 10 8 6 4 2 0 1 2 3 4 5 D A slope = 10/5 = 2, so 1/slope = 1/2 P/Q at point A = 4/3 So elasticity = P/Q • 1/slope = 2/3 In the diagram below, the absolute value of the price elasticity of demand at point D is equal to a. 3. b. 2
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Lecture 8 - Econ 201 Lecture 8 Price Elasticity of Demand A...

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