Computing the (Own) Price
Elasticity of Demand
•
Elasticity can help answer questions
such as:
–Should a firm raise or lower the price of a
good to increase revenues?
–If an excise tax is placed on a good, how
much tax revenue will be generated?

The (Own) Price Elasticity of
Demand Formula
∆
= change
P
Q
E
d
d
Δ
Δ
=
%
%
P & Q For the
same good!

Example
•
University parking pass prices increase by 50%.
•
As a result, 25% less people demand a parking
pass.
5
.
0
%
50
%
25
−
=
+
−
=
P
Q
E
d
d
Δ
Δ
=
%
%
Plug in
numbers

Example
•
What does the numerical result mean?
–In this case, the quantity demanded response was
relatively small (compared to the price change).
–Demand is inelastic for parking.
•
Why is it negative?
–There is an inverse relationship between price and
quantity demanded.
5
.
0
%
50
%
25
%
%
−
=
+
−
=
Δ
Δ
=
P
Q
E
d
d

The Percent Formula has a
problem.
•
One issue with using the percent change
formula.
–Price decreases from $100 to $80
•
A 20% change
–Price increases from $80 to $100
•
A 25% change!
•
Thus, the “direction” of the variable change
will change our numerical elasticity result.
How can we fix this?

Midpoint Method
•
The Midpoint Method is an alternative way to find
elasticity. The formula is more complicated.
(
) (
)
(
) (
)
P
P
E
d
of
average
/
/
Δ
=
(
) (
)
[
]
(
) (
)
[
]
2
/
/
/
P
P
P
P
E
d
+
−
=

Midpoint Method
• Example:
–
“Old” price. P
1
= $6 results in Q
1
= 15
–
“New” price. P
2
= $4 results in Q
2
= 25
(
) (
)
[
]
(
) (
)
[
]
2
/
/
2
/
/
2
1
1
2
2
1
1
2
P
P
P
P
Q
Q
Q
Q
E
d
+
−
+
−
=
(
) (
)
[
]
(
) (
)
[
]
2
/
4
6
/
6
4
2
/
25
15
/
15
25
+
−
+
−
=
d
E
25
.
1
5
/
2
20
/
10
−
=
−
=
d
E
Plug in
numbers

Economics in
Seinfeld
Jerry and George likely have different
(own)
price elasticity of demand for “The jacket”
?
v=E7YF6_ODMdM&feature=youtu.be

Elasticity:
Graphing the Price
Elasticity of Demand
4

Graphing (Own) Price
Elasticity
•
If demand is relatively elastic
–We are relatively sensitive to price
changes
–The demand curve is relatively flatter
•
If demand is relatively inelastic
–We are relatively insensitive to price
changes
–The demand curve is relatively steeper

Graphing (Own) Price Elasticity
0
%
%
=
Δ
Δ
=
P
Q
E
d
d
Numerator is
zero!

Graphing (Own) Price Elasticity
big"
"
small"
"
%
%
=
Δ
Δ
=
P
Q
E
d
d

Graphing (Own) Price Elasticity
small"
"
big"
"
%
%
=
Δ
Δ
=
P
Q
E
d
d

Graphing (Own) Price Elasticity
∞
−
=
Δ
Δ
=
%
%
P
Q
E
d
d
Denominator
is zero!

Remembering Own Price
Elasticity
•
Relatively shallow (flat) demand curves are
relatively more elastic.
•
Relatively steep demand curves are
relatively more inelastic.
•
Ways to remember:
– Steep demand curve looks like the letter “I,” so it
is “I”nelastic.
– Steep demand curve has an almost “I”nfinite
slope, and is “I”nelastic

Examples
P
Q
E
d
d
Δ
Δ
=
%
%
Elasticity
E
d
coefficient
Interpretation
Example

Time, Elasticity, and Demand Curve

Slope and Elasticity
•
Elasticity and the slope of the demand
curve are related, but are
NOT
the same.

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- Spring '16
- Betsy Sarlay
- Microeconomics, Price Elasticity, Supply And Demand