The Price elasticity of demand measures how much the quantity demand changes due to a
price increase or decrease. There are a few factors that determine elasticity: availability of
substitutes, necessity versus luxury, the broadness of a market, and time horizon, which is
defined as a length of time. People have an easier time finding substitutes and what not
over a long period of time rather than being able to switch to public transportation due to
an increase in gas prices.
Price elasticity of demand= percentage change in QD/ percentage change in Price
Calculating the elasticity of demand can be tricky, because going from point A to B can
give you a different number than going from B to A. Thus, we use the midpoint method
to determine elasticity.
Price elasticity of demand= different in Q/average q DIVIDED BY difference in
Demand is considered to be elastic when the elasticity of demand is greater than 1, while
it is inelastic when it is less than 1. If elasticity is exactly 1, then it is unit elastic. A given
rule: the more flat a graph is, the greater the elasticity of demand. When the graph is very
steep, the smaller the price elasticity of demand is. If a graph is a vertical line, the graph
is perfectly inelastic.
When studying change in supply and demand, we often want to study total revenue. Total
revenue equals price x quantity. If the elasticity is inelastic, then an increase in price
results in an increase in total revenue. That is because if an item is inelastic, then an
increase in price will result in a very small decrease in Q.
When it is inelastic, price and total revenue move in the same direction. When it is
elastic, price and total revenue move in opposite directions, and when it is unit elastic it
remains constant with an increase or decrease in price.
Income elasticity of demand= percentage change in Q/