Elasticity Price Elasticity of Demand: - You know that when supply decreases, the equilibrium price rises and the equilibrium quantity decreases. - But does the price rise by a large amount and the quantity decrease by a little? - Or does the price barely rise and the quantity decrease by a large amount? - The answer depends on the responsiveness of the quantity demanded of a good to a change in its price. - You might think about the responsiveness of the quantity demanded of a good to a change in its price in terms of the slope of the demand curve. - If the demand curve is steep, the price rises by a lot; if the demand curve is almost flat, the price barely rises. - But the slope of a demand curve depends on the units in which we measure the price and the quantity. We can choose these units to make the demand curve steep or flat. - To measure responsiveness we need a measure that is independent of units of measurement. - Elasticity is such a measure. - The price elasticity of demand is a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same. Calculating Price Elasticity of Demand - The price elasticity of demand is calculated by using the formula: - Percentage change in the quantity demanded/Percentage change in price - To calculate the price elasticity of demand:We express the change in price as a percentage of the average price-the average of the initial and new price, ... - and we express the change in the quantity demanded as a percentage of the average quantity demanded- the average of the initial and new quantity Average Price and Quantity - By using the average price and average quantity, we get the same elasticity value regardless of whether the price rises or falls. Percentages and Proportions - The ratio of two proportionate changes is the same as the ratio of two percentage changes. - %DeltaQ/%DeltaP = DeltaQ/DeltaP A Units-Free Measure - Elasticity is a ratio of percentages, so a change in the units of measurement of price or quantity leaves the elasticity value the same.
Minus Sign and Elasticity - The formula yields a negative value, because price and quantity move in opposite directions. - But it is the magnitude, or absolute value, that reveals how responsive the quantity change has been to a price change. Inelastic and Elastic Demand - Demand can be inelastic, unit elastic, or elastic, and can range from zero to infinity. - If the quantity demanded doesn't change when the price changes, the price elasticity of demand is zero and the good has a perfectly inelastic demand - If the percentage change in the quantity demanded is smaller than the percentage change in price, the price elasticity of demand is less than 1 and the good has inelastic demand. - If the percentage