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Elasticity and Its
Application
Chapter 5
Copyright © 2001 by Harcourt, Inc.
All rights reserved. Requests for permission to make copies of any part of the work should be mailed to:
Permissions Department, Harcourt College Publishers,
6277 Sea Harbor Drive, Orlando, Florida 32887-6777.

Elasticity . . .
… is a measure of how much buyers and
sellers respond to changes in market
conditions
… allows us to analyze supply and
demand with greater precision.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Price Elasticity of Demand
Price elasticity of demand is the
percentage change in quantity demanded
given a percent change in the price.
It is a measure of how much the quantity
demanded of a good responds to a change
in the price of that good.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Determinants of
Price Elasticity of Demand
Necessities versus Luxuries
Availability of Close Substitutes
Definition of the Market
Time Horizon
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Determinants of
Price Elasticity of Demand
Demand tends to be more elastic :
if the good is a luxury.
the longer the time period.
the larger the number of close
substitutes.
the more narrowly defined the market.

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Computing the Price Elasticity
of Demand
The price elasticity of demand is computed
as the percentage change in the quantity
demanded divided by the percentage
change in price.
Percentage Change
in Quantity Demanded
Price Elasticity of Demand =
Percentage Change
in Price

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Computing the Price Elasticity
of Demand
Price elasticity of demand =

Percentage change in quatity demanded
Percentage change in price

Example: If the price of an ice cream cone increases
from $2.00 to $2.20 and the amount you buy falls from
10 to 8 cones then your elasticity of demand would be
calculated as:

(10 − 8 )
× 100
20 percent
10
=
=2
( 2.20 − 2.00 )
10 percent
× 100
2.00
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Computing the Price Elasticity of
Demand Using the Midpoint
Formula
The midpoint formula is preferable when
calculating the price elasticity of demand
because it gives the same answer regardless
of the direction of the change.
(Q2 − Q1 )/[(Q2 + Q1 )/2]
Price Elasticity of Demand =
(P2 − P1 )/[(P2 + P1 )/2]
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Computing the Price Elasticity
of Demand
(Q2 − Q1 )/[(Q2 + Q1 )/2]
Price Elasticity of Demand =
(P2 − P1 )/[(P2 + P1 )/2]
Example: If the price of an ice cream cone increases
from $2.00 to $2.20 and the amount you buy falls from
10 to 8 cones the your elasticity of demand, using the
midpoint formula, would be calculated as:

(10 − 8)
22 percent
(10 + 8) / 2
=
= 2.32
(2.20 − 2.00)
9.5 percent
(2.00 + 2.20) / 2
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Ranges of Elasticity
Inelastic Demand
Quantity demanded does not respond strongly to
price changes.
Price elasticity of demand is less than one.

Elastic Demand
Quantity demanded responds strongly to changes
in price.
Price elasticity of demand is greater than one.
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Computing the Price Elasticity
of Demand
(100- 50)
(100 + 50)/2
ED =
(4.00- 5.00)
(4.00+ 5.00)/2

Price

$5
4

Demand

67 percent
=
= -3
- 22 percent

Demand is price elastic
0

50

100

Quantity

Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.

Ranges of Elasticity
Perfectly Inelastic
Quantity demanded does not respond to price
changes.

Perfectly Elastic
Quantity demanded changes infinitely with any
change in...
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