Lecture Assignment #3 Elasticity – 20110926
(Percentage change)
If >1 = elastic
If <1= inelastic
Example 1: 20%/10% = 2 : meaning >1 = elastic
Example 2: 10%/20%= 0.5: meaning <1= inelastic
∑d= Price elasticity of Demand
∑s= price elasticity of supply
∑I= income of demand elasticity
∑x/y= Cross Price Elasticity
1) ∑D Price Elasticity of Demand
 ∑d= () %Qxd/%Px= () %Q/ %P
 Why? Because as price Increase, Qd decreases = negative relationship

2) Relationship between ∑d and TR
3) ∑d= () %Q/ %P
a. N D
4) TR= P x Q
As price Increase
∑d
TR
Type
N>D
>1
↓
Elastic
N=D
=1
No change
Unit Elastic
N<D
<1
↑
Inelastic
3) Arc Elasticity
Reminder: ∑d= () %Q/ %P
∆P= 5
∆q=+10
∑d=  10/10 = 1
Base is Point A
 ∑d= (10/10) / (5/10) = 2
Base is point B
 ∑d=  (10/20) / (5/5) = ½
** Arc Elasticity Midpoint Formula
∑d=  (∆Q/ Average q) / (∆P/ Average Price)
Calculation referring to the above example: ∑d=  (10/15) / (5/7.5)=1
To prove the above calculation right, calculate TR: TR for A= 100; TR for B= 100 means Unit Elastic
Mid Point Formula
∑d=  (∆Q/ Average q) / (∆P/ Average Price)
>1= Elastic
=1 – Unit Elastic
<1= Inelastic
Price Elasticity of Demand
Arc Elasticity
∑d= 
Midpoint Formula
∑d=  (∆Q/ Average q) / (∆P/ Average Price)
>1= Elastic
=1 – Unit Elastic
<1= Inelastic
Point Elasticity