ELASTICITY
Chapter – 4/2
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What is Elasticity?
Elasticity refers to the degree of responsiveness in
demand in relation to changes in price
If a curve is more elastic, then small changes in
price will cause large changes in quantity
consumed.
If a curve is less elastic, then it will take large
changes in price to effect a change in quantity
consumed
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At the extremes, a perfectly elastic curve will
be horizontal, and a perfectly inelastic curve
will be vertical.
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How Is Elasticity Measured?
Elasticity = (% Change in Quantity)/(% Change in Price)
I.
Noora had 10 pens when the price was 1 R BUT she
had 6 only when the price raise to 1.5 R
% Change in Quantity = (6-10)/10 = -0.4 = -40%
% Change in Price = (1.50-1)/1 = 0.5 = 50%
(-40%)/(50%) = -0.8
Elasticity of Demand = 0.8
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Elasticity
to study elasticity over a curve, rather than at a
specific point, is to calculate elasticity using the
following formula:
Elasticity = (Change in quantity/Average
quantity) / (Change in price/Average price)
Elasticity = ((Q1 - Q2) / (Q1 + Q2)/2 )) / ((P1 P2)/( (P1 + P2)/2))
Elasticity = (Q1 - Q2) / (P1 - P2)*
(P1 + P2)/2)/ (Q1 + Q2)/2
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The price falls to
$19.50 and the
quantity demanded
increases to 11
pizzas an hour.
The price falls by $1
and the quantity
demanded increases
by 2 pizzas an hour.
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Average Price and Quantity
you have the following table : Calculate the price
elasticity of demand:
The Original
Point
The New
Point
The Average
P1= 20.5
P2 = 19.5
P aver= 20
Q1= 9
Q 2 = 11
Q aver= 10
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Price Elasticity of Demand
The price elasticity of
demand is
%DQ/ %DP = (1/5)/(1/20)
= 20/5
=4
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. Example 2: Elasticity of Demand
Suppose we were looking at the demand for McDonald’s
Hamburgers at a particular location. When they had a
p=$0.75 they had a Qd=1000 hamburgers per day. The
owner of the McDonald’s decided to raise price to
p=$1.00 and found that demand dropped to Qd=900 per
day. Calculate the elasticity of demand for hamburgers at
this McDonald’s.
Elasticity of demand =%∆Q / %∆P= [(Q2-Q1) / Qave] 
/ [(P2-P1) / Pave]
Applying the above formula to the data given we get:│ [(900- 
1000)/950]/[(1.00-.75)/.875]│≈-0.368
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Elasticity Along a straight- Line Demand
Curve
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Elasticity Along a straight- Line
Demand Curve
Elasticity decreases as the price falls and quantity
demanded increases.
At midpoint of a demand curve , the demand is
unit elastic.
Above the midpoint of a demand curve , the
demand is elastic.
Below the midpoint of a demand curve , the
demand is inelastic.
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