Microeconomics 200 - Wednesday, July 24th notes
Chapter 5 - Elasticity
Elasticity - responsiveness to a change in price
Elasticity of demand - The percentage change in quantity demanded resulting from a percentage
change in price
As seen above: there’s a movement along the curve when price changes. However, graph #1 is
more elastic because it has a steeper slope (greater slope) y2-y1/x2-x1 ..
6/10 > 0.25/240 … meaning, graph 1 represents a greater responsiveness of buyers to change in
Midpoint Formula - to calculate percentages - calculating elasticities
% change in QD / % change in Price
which equals to.... Q1 - Q0 / (Q1+Q0 / 2) / P1 - P0/ (P1+P0 / 2)
Elasticity = always a
negative number ->
take the absolute
value of it Perfect Inelasticity of Demand = 0
No change in quantity no matter how much price changes
* economists argue that this never happens for any good
Inelastic Demand - people buy close to the same amount regardless of price change.
* therefore, buyers react little (drugs, medicine, etc.)
* Ed = 0 : perfectly inelastic demand
* Ed < 1 : inelastic demand
* Ed > 1 : elastic demand
* Ed = infinity : perfectly elastic demand
An increase in price yields a greater decrease in quantity; buyers react more.
Perfectly Elastic Demand
Consumers will buy any quantity at $9, but none at a higher price. Infinite amount of quantities
purchased at $9.
Unit Elasticity = 1 (revenues never change)
% change P = % change Q
percentage change in quantity demanded = % change in price Elasticity is always changing in a straight line, not constant, becomes more inelastic as it goes
Revenue: Price x Quantity -> always true