Published on 10 Aug 2010

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Note on Elasticity

Elasticity definitions

D = elasticity of demand = percentage change in quantity demanded

percentage change in price

= [Qafter – Qbefore] / Qbefore = [Q/P]

[Pafter – Pbefore] / Pbefore [Q/P]before

• ignore the negative sign and just take the magnitude

• calculate with a small change in price, such as a $1 change

S = elasticity of supply = percentage change in quantity supplied

percentage change in price

elasticity = 0 = completely inelastic = fixed

elasticity falls between 0 and 1 = inelastic

elasticity greater than 1 = elastic

elasticity = completely elastic = fully flexible = free

Joint elasticity approximation

= joint elasticity = DS /[D+S] = D{S /[D+S]} = S{D /[D+S]}

situation

D S (exact) (approx)

100

1

0.99

1

one elasticity

very large

(very flexible)

1

100

0.99

1

0.1

1

0.09

0.1

one elasticity

very small

(nearly fixed)

1

0.1

0.09

0.1

rule of thumb (expressed in two ways)

1) when one elasticity is much larger than the other (e.g. is ), approximate the joint

elasticity with the smaller one

2) when one elastticity is much smaller than the other (e.g. is zero), approximate the joint

elasticity with the smaller one

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