1 Price Elasticity of Demand 1
14.01 Principles of Microeconomics, Fall 2007 Chia-Hui Chen
September 10, 2007
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 .
E %△P △P
ED| = Q = 4 =−1.
2 P p=2→1 ΔP −1
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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 .
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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