ECON107 Principles of Microeconomics Week 7 OCTOBER 2013 Chapter-4 1 7w/10/2013 Dr. Mazharul Islam 4 7w/10/2013 Elasticity Dr. Mazharul Islam 3 Lesson Objectives Define elasticity Define and calculate the price elasticity of demand. Define and explain the elastic, inelastic, unit-elastic, perfect elastic and perfect inelastic demand. 7w/10/2013 Dr. Mazharul Islam 4 Price Elasticity of Demand In economics, elasticity is the measurement of how changing one economic variable affects others. 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. In simplest terms, the price elasticity of demand measures the percent change in quantity demanded divided by the percent change in price. 7w/10/2013 Dr. Mazharul Islam 5 Price Elasticity of Demand Price elasticity of demand Percentage change in quantity demanded Percentage change in price Qd Qd Qd %Qd Qave (Qd Qd ) / 2 D %P P P P ( P P) / 2 Pave E Here, P = initial price, Qd = initial quantity, P’ = new price, Q’d = new quantity, = change 7w/10/2013 Dr. Mazharul Islam 6 Point elasticity: It measured elasticity at a given point of a demand (or a supply) curve. The point elasticity of a linear demand function can be expressed as: Q P1 p P Q1 7 Price Elasticity of Demand Because the law of demand states that price and quantity demanded are inversely related, the change in price and the change in quantity demanded have opposite signs the price elasticity of demand has a negative sign. But it is absolute value, that reveals how responsive the quantity change has been to a price change. 7w/10/2013 Dr. Mazharul Islam 8 Price Elasticity of Demand The price elasticity of demand can be divided into three general categories depending on how responsive quantity demanded is to a change in price. If the percent change in quantity demanded is smaller than the percent change in price, the resulting price elasticity has an absolute value between 0 and 1.0 demand is inelastic. 7w/10/2013 Dr. Mazharul Islam 9 Price Elasticity of Demand $1.10 b Price per taco 0.90 a D 0 Thousands per day 95 105 7w/10/2013 Dr. Mazharul Islam 10 Price Elasticity of Demand the percent change in quantity demanded just equals the percent change in price a price elasticity with an absolute value of 1.0 unitelastic demand. Price per unit If E D= $10 a b 6 0 7w/10/2013 1 D" 60 100 Quantity per period Dr. Mazharul Islam 11 Price Elasticity of Demand If the percent change in quantity demanded exceeds the percent change in price, the resulting price elasticity has an absolute value exceeding 1.0 demand is said to be elastic 7w/10/2013 Dr. Mazharul Islam 12 Price Elasticity of Demand $1.10 a b Price per taco 0.90 0 D 65 105 Thousands per day 7w/10/2013 Dr. Mazharul Islam 13 Price Elasticity of Demand If no change in quantity demanded with the change in price a price elasticity with an absolute value of 0.0 perfectly inelastic demand. 7w/10/2013 Dr. Mazharul Islam 14 Price Elasticity of Demand If the percentage change in the quantity demanded is infinitely large when the price barely changes a price elasticity with an absolute value of perfectly elastic demand. 7w/10/2013 Dr. Mazharul Islam 15 Price Elasticity of Demand Elasticity Curve Along a Linear Demand Along a linear demand curve, demand is: Unit elastic at the midpoint of the curve. Elastic above the midpoint of the curve. Inelastic 7w/10/2013 below the midpoint of the curve. Dr. Mazharul Islam 16 Price Elasticity of Demand Elasticity Curve Along a Linear Demand Figure shows that the elasticity decreases along a linear demand curve as the price falls. 1. At any price above the midpoint, demand is elastic. 2. At the midpoint, demand is unit elastic. 3. At any price below the midpoint, demand is inelastic. 7w/10/2013 Dr. Mazharul Islam 17 Now it’s over for today. Do you have any question? 5w/9/2013 Dr. Mazharul Islam