# demand elasticity

Pages: 8 (2156 words) Published: April 29, 2015
Elasticity . . .

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.

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Price Elasticity of Demand
elasticity of demand is the
percentage change in quantity demanded
given a percent change in the price.

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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.

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Necessities versus Luxuries

Availability of Close Substitutes

Definition of the Market

Time Horizon

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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

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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...