October 3, 2013
CHAPTER 4: ELASTICITY
• Price elasticity of demand: is a unit-free measurement of the responsiveness of the quantity
demanded of a good to a change in its price when all other influences on buying plans
remain the same.
• Calculating price elasticity of demand:
o %CHG in quantity demanded / %CHG in price
> 1 - elastic
=1 - unit elastic (unitary)
< 1 - inelastic
o We express the change in price as a percentage of the average price—the average
of the initial and new price, and we express the change in the quantity demanded as
a percentage of the average quantity demanded
Price of a pizza is $20.50 and 9 demanded falls to $19.50 and increase to 11 demanded
Price falls $1 but quantity demanded increases by 2 pizzas/hour Average price is $20 and
average quantity demanded is 10 pizzas/hour
%CHG in quantity demanded = %CHG quantity / %CHG avg. quantity = (2/10) x 100 = 20%
%CHG in price = %CHG price / %CHG avg. quantity = ($1/$20) x 100 = 5%
• If the quantity demanded doesn’t change when the price changes, the price elasticity of
demand is zero and the good as a perfectly inelastic demand
• Total revenue and elasticity ECON 1000
October 3, 2013
o Total revenue from the sale of good or service equals the price of the good multiplied
by the quantity sold.
If demand is elastic, a 1 percent price cut increases the quantity sold by more
than 1 percent, and total revenue increases.
If demand is inelastic, a 1 percent price cut increases the quantity sold by
less than 1 percent, and total revenues decreases.
If demand is unit elastic, a 1 percent price cut increases the quantity sold by 1
percent, and total revenue remains unchanged.
• Your expenditures and elasticity
o If your demand is elastic, a 1 percent price cut increases the quantity you buy by
more than 1 percent and your expenditure on the item increases.
o If your demand is inelastic, a 1 percent price