AP Economics Mr. Bernstein Module 47: Interpreting Price Elasticity of Demand October 17, 2014

AP Economics Mr. Bernstein What Does the Value of Elasticity Tell Us? Example: Ed = %ΔQ d /%ΔP = 10; P rises 1% Algebra: %  Q d /1% = 10, so %  Q d = 10% fall in Q d 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) 2

AP Economics Mr. Bernstein Examples of Perfectly Inelastic and Elastic Curves xxxx 3

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 4

AP Economics Mr. Bernstein Elasticity and Total Revenue TR = P x Q Price effect: Raise P, R tends to rise Quantity effect: Raise P, Q d falls, so R tends to fall 5

AP Economics Mr. Bernstein Elasticity along the Demand Curve TR begins to fall as prices rise and Elasticity grows 6

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 7

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 8