Price Elasticity of Demand
What is it (in simple language)?
It’s how much buyers will respond to a change in
price.
It’s the percentage change in quantity
demanded ÷ the percentage change in price.
Example: quantity demanded goes up 10% when
price goes down 10%.
10% ÷ 10% = 1, elasticity = 1 (unit elastic)
Price Elasticity of Demand
Example #2: quantity demanded goes down 20%
when price goes up 10%.
20% ÷ 10% = 2, elasticity = 2 (elastic or relatively elastic)
Example #3: quantity demanded goes down 10%
when price goes up 20%.
10% ÷ 20% = .5, elasticity = .5 (inelastic or relatively
inelastic)
Price Elasticity of Demand
How do you calculate it?
Yes, use the midpoint method.
But don’t worry. Remember, on the AP test, you
can’t use a calculator, so all the math is easy.
Example:
Price goes from $9 to $11
Change in Price: 2/10 = 20%
Quantity goes from 21 units to 19 units.
Change in Quantity: 2/20 = 10%
Elasticity Coefficient = 10/20 = .5
On the AP test, all calculations of actual elasticity
coefficients will be easy – and they will be rare.
PRICE
Elastic
Unit Elastic
Inelastic
D
QUANTITY OF ARTICHOKES
Price Elasticity of Demand
Elasticity Coefficients
What does it mean for demand for a product to
be inelastic? (or relatively inelastic) Ed < 1.
What does it mean for demand for a product to
be elastic? (or relatively elastic) Ed > 1.
What does it mean for demand for a product to
be unit elastic? Ed = 1.
PRICE
D
QUANTITY OF ARTICHOKES
PRICE
Elasticity Coefficients: Special Cases Ed = 0
Perfectly Inelastic
Demand
QUANTITY OF INSULIN
PRICE
Elasticity Coefficients: Special Cases Ed is undefined.
Perfectly Elastic
Demand
QUANTITY OF ?
Price Elasticity of Demand
Total Revenue
If demand for a product is elastic (Ed > 1), then
an increase in price will lead to a drop in total revenue.
It’s simple: if buyers respond a lot to a change in
price, then they’re going to buy a lot less if you raise
the price.
If demand for a product is inelastic (Ed < 1), an
increase in price will lead to an increase in total
revenue.
It’s simple if buyers don’t respond a lot to a
change in price, then they’re not going to buy a lot less
when you raise the price.
If demand for a product is unit elastic (Ed = 1), an
increase in price won’t affect total revenue.
Price Elasticity of Demand
In class problems:
DQ #1: Explain why the choice between 1, 2,3, 4
5, or 6 “units,” or 1000, 2000, 3000, 4000, 5000, and
6000 movie tickets makes no difference in determining
the elasticity of demand.
DQ #2: What effect would a rule stating that
university students must live in university dormitories
have on the price elasticity of demand for dorm
rooms? What impact might this have on room rates?
Price Elasticity of Demand
In class problems:
AP Review #1: Suppose that the total
revenue received by a company selling basketballs is
$600 when the price is $30 per basketball and $600
when the price is $20 per basketball. Is demand
elastic, inelastic, or unit elastic over this price range?
AP Review #2: What are the major determinants
of price elasticity of demand? Use those determinants
and your own reasoning in judging for demand for
each of the following is probably elastic or inelastic:
a) bottled water b) toothpaste
c) Crest toothpaste
d) ketchup
e) diamond bracelets
f) Microsoft Windows
Price Elasticity of Demand
Homework:
Read the rest of Chapter 6
1. Explain price elasticity of supply.
2. What factors determine price elasticity of supply.
3. How is price elasticity of supply different over the
market period, the short run, and the long run. Why
is it different over these time periods?
4. Do discussion question #4 and problems 1, 2, 4, & 5.