# demand elasticity

**Topics:**Supply and demand, Price elasticity of demand, Elasticity

**Pages:**8 (2156 words)

**Published:**April 29, 2015

Elasticity and Its

Application

… 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.

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.

Price Elasticity of Demand

elasticity of demand is the

percentage change in quantity demanded

given a percent change in the price.

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

Determinants of

Price Elasticity of Demand

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.

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

Computing the Price Elasticity

of Demand

Demand tends to be more elastic :

The price elasticity of demand is computed

as the percentage change in the quantity

demanded divided by the percentage

change in price.

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.

Price Elasticity of Demand =

Percentage Change

in Quantity Demanded

Percentage Change

in Price

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

1

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.

Price Elasticity of Demand =

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

Computing the Price Elasticity

of Demand

Price Elasticity of Demand =

(Q2 Q1 )/[(Q 2 Q1 )/2]

(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

Price

ED

$5

4

Demand

(100- 50)

(100 50)/2

(4.00- 5.00)

(4.00 5.00)/2

Ranges of Elasticity

Perfectly

100

Quantity

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

Elastic

Quantity demanded changes infinitely with any

change in price.

Unit

50

Inelastic

Quantity demanded does not respond to price

changes.

Perfectly

67 percent

-3...

Please join StudyMode to read the full document