Interpreting Price Elasticity of Demand AP Economics Mr. Bernstein Module 47: Interpreting Price Elasticity of Demand October 2017

AP Economics Mr. Bernstein What Does the Value of Elasticity Tell Us? Example: Ed = %ΔQd/%ΔP = 10; P rises 1% Algebra: %rQd/1% = 10, so %rQd = 10% fall in Qd For a business, this is a dramatic fall in sales due to a small price increase Elasticity describes the steepness of the demand curve Elasticity of zero = “perfectly inelastic” – changes in prices have no impact on quantity demanded (vertical) “Perfectly elastic” – changes in prices have infinitely large impact on quantity demanded (horizontal curve)

AP Economics Mr. Bernstein Examples of Perfectly Inelastic and Elastic Curves xxxx

AP Economics Mr. Bernstein What Does the Value of Elasticity Tell Us? In general terms: Inelastic means a steep or steeper curve Elastic means a flat or flatter curve

AP Economics Mr. Bernstein Elasticity and Total Revenue TR = P x Q Price effect: Raise P, R tends to rise Quantity effect: Raise P, Qd falls, so R tends to fall

AP Economics Mr. Bernstein Elasticity along the Demand Curve TR begins to fall as prices rise and Elasticity grows

AP Economics Mr. Bernstein Determinants of Elasticity # of Substitutes More substitutes, more elasticity Luxury or Necessity More necessary, less elasticity Example: Insulin vs. Bicycles Share of Income Spent Larger percent of budget, more elasticity AKA Expensive vs. Inexpensive Time More time involved, more elasticity

AP Economics Mr. Bernstein Determinants of Elasticity, cont. Total Revenue (TR) Test If TR rises as P rises, demand is inelastic If TR falls as P falls, demand is inelastic If TR falls as P rises, demand is elastic If TR rises as P falls, demand is elastic Elasticity Coefficient Test If Elasticity >1, it is elastic If Elasticity <1, it is inelastic