AP Economics
October 2015

AP Economics
Mr. Bernstein
• Applies to the relationship between any two variables, such as price and quantity demanded
• The Law of Demand states there is an inverse relationship between price and quantity demanded
• Elasticity measure the responsiveness – ie we know the quantity demanded decreases when prices increase, but by how much?
• Examples: Gas doubles in price - what will be the effect on driving? The price of pens double - will this change your writing habits?
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AP Economics
Mr. Bernstein
• % change in the dependent variable / % change in the independent variable
• Aka % r dep / % r ind
• Price Elasticity of Demand is % change in Quantity
Demanded / % change in Price
• Aka E d
= % r Q d
/ % r P
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AP Economics
Mr. Bernstein
• Problem: Using E d
= % r Q d
/ % r P formula, the
Elasticity of Demand calculations will change if the starting and ending points are reversed!!
• Example: If price rises from 100 to 110, this is
10% increase. If price drops from 110 to 100, this is 9.1% decrease
• Solution: Use the Midpoint Formula
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AP Economics
Mr. Bernstein
The Midpoint Formula
• % r P = 100*(New Price – Old Price) / Average Price
• % r Q d
= 100*(New Quantity Demanded – Old Quantity
Demanded) / Average Quantity Demanded
• Example: Rutgers raises tuition from $20,000 to $24,000 per year. The number of new freshman declines from
10,000 to 8,000. How elastic is demand?
• % r P = 100*(20,000-24,000)/22,000 = 18 and
• % r Q d
• E d
= 100*(10,000-8,000)/9,000 = 22
= 18 / 22 or .81, an inelastic response between the two points on the demand curve
• Without Midpoint Formula, E d
= 20/20, or 1.0 (unit elastic)
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