Transcript Solution: Price elasticity of demand The price elasticity of demand is

Economics 100
Lecture 8
Elasticity
Elasticity
 Price
elasticity of demand
 Calculating the price elasticity of
demand
Price Elasticity of Demand
A
measure of the responsiveness of the
quantity demanded to price holding
other things constant
Price Elasticity of Demand
 Figure
5.1
(a) shows
the case
in which a
cut in
supply
increases
total
revenue
Price Elasticity of Demand
 Figure
5.1
(b) shows
the case
in which
that same
cut in
supply
decreases
total
revenue
Price Elasticity of Demand
 Whether
total revenue increases or
decreases with a price change depends
on how sensitive the quantity demanded
is to a change in price
 We would like to derive a measure of
that sensitivity...
Price Elasticity of Demand
 The
slope of a demand curve is a
measure of the responsiveness of the
quantity demanded of a good to a
change in its price, holding constant all
other influences on the quantity
demanded
 Problem: slope depends on units of
measurement!!!!!!!!!! (we cannot compare the
demand for pizza and the demand for books!!!)
Price Elasticity of Demand
 Solution:
Price elasticity of demand
 The price elasticity of demand is the
percentage change in the quantity
demanded of a good divided by the
percentage change in its price
 Elasticity does not depend on units of
measurement!!!
Calculating the Price Elasticity
of Demand
%Q
-------------%P
Note for ECON 100
IN ECON 100 we will calculate percentages
of the average price and average quantity to
avoid different numbers for a price rise and
price fall
 This means that we really calculate the
elasticity at a point midway between the
equilibrium point before and after the price
change. Ideally, we would want to calculate it
at a single point, with no approximations…

%Q
Q/ Qave
------- = ----------%P
P/ Pave
Calculating the Price Elasticity
of Demand
% Q

% P
Q
Q ave

P
Pave
Calculating the Price Elasticity
of Demand
2
40  0.5
1
10
Calculating the Price Elasticity
of Demand
 Negative
sign
 Price increase (a positive change in
price) leads to a
 Quantity decrease (a negative change
in quantity)
 The formula uses the absolute value of
these changes and does not attach the
minus sign to the decrease in quantity
ELASTICITY
 Note
that the price-elasticity of demand
is UNIT-FREE!!!, which is very useful for
comparisons!
 Between countries
 between goods
 over time
Next, more
about
elasticities