Transcript Module 47 - Interpreting Price Elasticity of Demand

AP Economics
Mr. Bernstein
Module 47:
Interpreting Price Elasticity of Demand
October 17, 2014
AP Economics
Mr. Bernstein
What Does the Value of Elasticity Tell Us?
• Example: Ed = %ΔQd/%ΔP = 10; P rises 1%
• Algebra: %rQd/1% = 10, so %rQd = 10% fall in Qd
• For a business, this is a dramatic fall in sales due to a
small price increase
• Elasticity describes the steepness of the demand curve
• Elasticity of zero = “perfectly inelastic” – changes in
prices have no impact on quantity demanded (vertical)
• “Perfectly elastic” – changes in prices have infinitely
large impact on quantity demanded (horizontal curve)
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Examples of Perfectly Inelastic and Elastic Curves
• xxxx
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What Does the Value of Elasticity Tell Us?
• In general terms:
• Inelastic means a steep or steeper curve
• Elastic means a flat or flatter curve
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Elasticity and Total Revenue
• TR = P x Q
• Price effect: Raise P, R tends to rise
• Quantity effect: Raise P, Qd falls, so R tends to fall
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Elasticity along the Demand Curve
• TR begins to fall as prices rise and Elasticity grows
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Determinants of Elasticity
• # of Substitutes
• More substitutes, more elasticity
• Luxury or Necessity
• More necessary, less elasticity
• Example: Insulin vs. Bicycles
• Share of Income Spent
• Larger percent of budget, more elasticity
• AKA Expensive vs. Inexpensive
• Time
• More time involved, more elasticity
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Determinants of Elasticity, cont.
• Total Revenue (TR) Test
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If TR rises as P rises, demand is inelastic
If TR falls as P falls, demand is inelastic
If TR falls as P rises, demand is elastic
If TR rises as P falls, demand is elastic
• Elasticity Coefficient Test
• If Elasticity >1, it is elastic
• If Elasticity <1, it is inelastic
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