01.29 Chapter 6 Elasticity
Price Elasticity of Demand: is the ratio of the percent change in the quantity demanded to the
percent change in the price as we move along the demand curve (dropping the minus sign).
To calculate the price elasticity of demand
1. Calculate percent change in quantity demanded and corresponding percent change in
the price we move along the demand curve.
In Figure 6 , we see that when the price rises from $20 to $21, the quantity demanded falls from 10 million to 9.9
million vaccinations, yielding a change in the quantity demanded of 0.1 million vaccinations. So the percent change in
the quantity demanded is 01.29 Chapter 6 Elasticity
The initial price is $20 and the change in the price is $1, so the percent change in price is
To calculate the price elasticity of demand, we find the ratio of the percent change in the quantity demanded to the
percent change in the price:
In Figure 6 , the price elasticity of demand is therefore
Law of demand: demand curves are downward ▯ quantity demanded moves opposite direction.
Positive percent change (rise is price) leads to negative percent change (quantity demanded).
The larger the price elasticity of demand the more responsive the quantity demanded is to the price.
o Demand is highly elastic when consumer change their quantity demanded by a large percentage
compared with percent change in the price.
o Inelastic demand: when the quantity of demand falls by a small amount when prices rise.
Price elasticity of demand compares the percent change in quantity demanded with the percent change
Midpoint method: is a technique for calculating the percent change. In this approach, we calculate changes in a
variable compared with the average, or midpoint of the starting and final values.
where the average value of X is defined as
To calculate the percent change in quantity going from situation A to situation B, we compare the change in the
quantity demanded—a fall of 200 units—with the average of the quantity demanded in the two situations. So we
calculate 01.29 Chapter 6 Elasticity
So in this case we would calculate the price elasticity of demand to be drop ()
The important point is that we would get the same result, a price elasticity of demand of 1, whether we go up the
demand curve from A to B or down.
To arrive at a more general formula for price elasticity of demand, data for two points on a demand curve. Point 1 the
quantity demanded and price are (Q , P );1poin1 2 they
are (Q ,P ).
As before, when finding a price elasticity of demand calculated by the midpoint method, we drop the minus sign and
use the absolute value.
When consumer will pay no attention to price and buy (62)
Demand perfectly inelastic: when the quantity demanded does not respond at all to changes in the price.
When demand is perfectly inelastic the demand curve is a vertical line.
Demand perfectly elastic when any price increase will cause the quantity demanded to drop to zero. When demand is perfectly
elastic, the demand curve is a horizontal line.
Elastic: if price elasticity of demand is greater than 1
Inelastic: if price elasticity of demand is less than 1
Unit elastic: if price elasticity of demand is exactly 1. 01.29 Chapter 6 Elasticity
Panel (a) shows what happens when the toll is raised from $0.90 to $1.10 and the demand curve
is unitelastic. Here the 20% price rise leads to a fall in the quantity of cars using the bridge each
day from 1,100 to 900,which is a 20% decline (again using the midpoint method). So the price
elasticity of demand is 20%/20% = 1.
Elasticity classification predicts how changes in the price of a good will affect the total revenue earned by
producers from the sale of that good.
Total revenue: the total value of sales of a good or service, equal to the price multiplied by the quantity sold. (6
6) Total revenue = Price × Quantity sold
(a) So the total revenue at a price of $0.90 is $0.90 × 1,100 =
$990.This value is equal to the area of the green
rectangle, which is drawn with the bottom left corner at the
point (0, 0) and the top right corner at(1,100, 0.90). In
general, the total revenue at any given price is equal to the area
of a rectangle whose height is the price and whose width is the
quantity demanded at that price.
Rare case when good is perfectly elastic or inelastic, seller raises the price
and two countervailing effects are present:
1. A price effect: price increase, each unit sold sells at a higher price, which tends to raise revenue.
2. A quantity effect: price increase, fewer units are sold, which tends to lower revenue.
The price elasticity of demand tells us what happens to total revenue when price changes: its size determines wh