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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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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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 Spring '08
 Staff
 Macroeconomics, Price Elasticity

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