ECON 001 Lecture Notes - Lecture 5: Demand Curve, Budget Constraint, Normal Good
Chapter 5 Elasticity
Elasticity: tool used to measure the response of one variable to a change in another.
I. Price Elasticity of Demand
(E^d)= (%change in Q^D)/(%change in P)
Always be negative be, simply drop negative
Percentage Change (Midpoint Method): %change in demand Q^D= [(Q2 - Q1)/((Q2 +
Q1)/2))] times 100
%change in price (use same place of variables but plus in price units)
P1 = $4, Q = 45
P2 = $2, Q = 55
55-45
((45+55)/2)) times 100 = 20%
2-4
((4+2)/2) times 100 = -66.67%
20/-66.67
.30
*As we move down the demand curve, elastic gradually becomes inelastic
C. Types of Price Elasticity of Demand
1. Perfectly Inelastic- (E^d = 0), quantity demanded is completely unresponsive to
changes in price.
2. Inelastic Demand- (0 < E^d < 1) quantity demanded is relatively unresponsive to
changes in prices. Most goods that are necessities, will have an inelastic demand
(electricity and gas). Demand curve relatively steep.
3. Unit Elastic Demand ( E^d = 1) if price goes up 10%, then Q^d is 10%)
Document Summary
Elasticity: tool used to measure the response of one variable to a change in another: price elasticity of demand (e^d)= (%change in q^d)/(%change in p) Percentage change (midpoint method): %change in demand q^d= [(q2 - q1)/((q2 + %change in price (use same place of variables but plus in price units) *as we move down the demand curve, elastic gradually becomes inelastic: types of price elasticity of demand. 2: perfectly inelastic- (e^d = 0), quantity demanded is completely unresponsive to changes in price. Inelastic demand- (0 < e^d < 1) quantity demanded is relatively unresponsive to changes in prices. Most goods that are necessities, will have an inelastic demand (electricity and gas). Demand curve relatively steep: unit elastic demand ( e^d = 1) if price goes up 10%, then q^d is 10%, elastic demand (1
