# Price Elasticity of Demand Econ 201

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

**Pages:**4 (935 words)

**Published:**July 8, 2013

14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen

September 10, 2007

Lecture 3

Elasticities of Demand

Elasticity. Elasticity measures how one variable responds to a change in an other variable, namely the percentage change in one variable resulting a one percentage change in another variable. (The percentage change is independent of units.) ￼￼Outline

1. Chap 2: 2. Chap 2: 3. Chap 2: 4. Chap 2:

Price Elasticity of Demand

Income Elasticity of Demand

Cross Price Elasticity of Demand

Comparison of Elasticity Over Short Run and Long Run

1 Price Elasticity of Demand

Price elasticity of demand. Price elasticity of demand measures the per centage change in quantity demanded resulting from one percentage change in price. Example Calculation

Figure 1 shows a demand curve:

Q(P ) = 8 − 2P.

When the price changes from 2 to 1, the price elasticity of demand is: %△Q △Q P = Q .

￼ED =

E %△P △P

￼￼￼ΔQ

ED| = Q = 4 =−1.

2 P p=2→1 ΔP −1

P

￼￼￼￼￼￼P2

Cite as: Chia-Hui Chen, course materials for 14.01 Principles of Microeconomics, Fall 2007. MIT OpenCourseWare (http://ocw.mit.edu), Massachusetts Institute of Technology. Downloaded on [DD Month YYYY]. ￼

1 Price Elasticity of Demand 2

￼￼Figure 1: Price Elasticity of Demand.

If the direction of change is opposite, from 1 to 2, then the price elasticity of demand is:

ΔQ −2 1 E PD | P = 1 → 2 = ΔQP = 61 = − 3 .

￼￼￼￼￼￼￼P1

The two quantities are different. To solve this conflict, consider small changes in P and Q, and define:

Thus, at the point P = 2, the price elasticity of demand is: E PD | P = 2 = P d Q = 2 × ( − 2 ) = − 1 . Properties of Price Elasticity of Demand

1. Price elasticity of demand is usually a negative number.

2. |EP | > 1 indicates that the good is price elastic, perhaps because the good has many substitutes; |EP | < 1 indicates that the good is price inelastic, perhaps because the good has few substitutes. 3. Given a linear demand curve, EP is not a...

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