Own Price Elasticity of Demand
EQX PX
%DQX DQX DPX
=
=
÷
%DPX
QX
PX
DQX 1
= = 0.2
DQX = 1 %DQX =
QX
5
DPX -6
=
= -0.33
DPX = -6 %DPX =
PX
18
1
Period 1
Period 2
Quantity
5
6
Price
18
12
EQX PX
%DQX
0.2
=
=
= -0.61
%DPX
-0.33
This takes Period 1 as the base and
gives the elasticity as we move from
a price of $18 to a price of $12.
Moving from a price of $12 to $18
EQX PX
%DQX DQX DPX
=
=
÷
%DPX
QX
PX
DQX -1
=
= -0.17
DQX = -1 %DQX =
QX
6
DPX = 6
2
DPX
6
%DPX =
= = 0.5
PX
12
Period 1
Period 2
Quantity
5
6
Price
18
12
EQX PX
%DQX -0.17
= -0.34
=
=
0.5
%DPX
This takes Period 2 as the base and
gives the elasticity as we move from a
price of $12 to a price of $18.
Comparing base prices
EQX PX
%DQX DQX DPX
=
=
÷
%DPX
QX
PX
From P = $18 to P = $12
DQX = 1
EQX PX
3
Period 1
Period 2
Quantity
5
6
Price
18
12
From P = $12 to P = $18
DPX = -6
%DQX
0.2
=
=
= -0.61
%DPX
-0.33
DQX = -1
EQX PX
DPX = 6
%DQX -0.17
=
=
= -0.34
%DPX
0.5
Own Price Elasticity of Demand
EQX PX
Elastic:
EQX , PX > 1
%DQX
=
%DPX
%DQX > %DPX
Strong reaction to
changes in price.
Inelastic:
EQX , PX < 1
%DQX < %DPX
Little reaction to
changes in price.
Unitary:
EQX , PX = 1
%DQX = %DPX
1:1 movement. More
of a placeholder
4
Elasticity and Revenue
TotalRevenue = P ´ Q
Effects of Price Change on
Quantity Demanded
5
P
Q
P
Q
Total Revenue and Elasticity
Price Increase
Elastic Demand
Inelastic Demand
6
Price Decrease
Elasticity and Total Revenue
P
100
Elastic
Unit elastic
80
60
40
Inelastic
20
0
7
10
20
30
40
50
Q
Elasticity is a general concept
DG
% DG
EG , S =
= G
DS
%DS
S
} Own-price elasticity
} Cross-price elasticity
} Income elasticity of demand
}
Own-price elasticity of supply
Advertising elasticity
}
Key Idea: How responsive is one variable to changes in another variable
}
8