ELASTICITY Chapter – 4/2 Hanan-1071

What is Elasticity?  Elasticity refers to the degree of responsiveness in demand in relation to changes in price  If a curve is more elastic, then small changes in price will cause large changes in quantity consumed.  If a curve is less elastic, then it will take large changes in price to effect a change in quantity consumed Hanan-1072

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At the extremes, a perfectly elastic curve will be horizontal, and a perfectly inelastic curve will be vertical. Hanan-1074

How Is Elasticity Measured? I. Elasticity = (% Change in Quantity)/(% Change in Price) Noora had 10 pens when the price was 1 R BUT she had 6 only when the price raise to 1.5 R % Change in Quantity = (6-10)/10 = -0.4 = -40% % Change in Price = (1.50-1)/1 = 0.5 = 50% (-40%)/(50%) = -0.8 Elasticity of Demand = 0.8 Hanan-1075

Elasticity  to study elasticity over a curve, rather than at a specific point, is to calculate elasticity using the following formula:  Elasticity = (Change in quantity/Average quantity) / (Change in price/Average price) Elasticity = ((Q1 - Q2) / (Q1 + Q2)/2 )) / ((P1 - P2)/( (P1 + P2)/2))  Elasticity = (Q1 - Q2) / (P1 - P2)* (P1 + P2)/2)/ (Q1 + Q2)/2 Hanan-1076

7 The price falls to $19.50 and the quantity demanded increases to 11 pizzas an hour. The price falls by $1 and the quantity demanded increases by 2 pizzas an hour.

Average Price and Quantity you have the following table : Calculate the price elasticity of demand: The AverageThe New Point The Original Point P aver = 20P 2 = 19.5P 1 = 20.5 Q aver = 10Q 2 = 11Q 1 = 9 Hanan-1078

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The price elasticity of demand is %  Q/ %  P = (1/5)/(1/20) = 20/5 = 4 Price Elasticity of Demand Hanan-10710

. Example 2: Elasticity of Demand Hanan  Suppose we were looking at the demand for McDonald’s Hamburgers at a particular location. When they had a p=$0.75 they had a Qd=1000 hamburgers per day. The owner of the McDonald’s decided to raise price to p=$1.00 and found that demand dropped to Qd=900 per day. Calculate the elasticity of demand for hamburgers at this McDonald’s.  Elasticity of demand =%∆Q / %∆P= [(Q 2 -Q 1 ) / Q ave ] / [(P 2 -P 1 ) / P ave ]  Applying the above formula to the data given we get: │ [( )/950]/[( )/.875] │ ≈-0.368

Elasticity Along a straight- Line Demand Curve Hanan-10712

Elasticity Along a straight- Line Demand Curve Elasticity decreases as the price falls and quantity demanded increases. At midpoint of a demand curve, the demand is unit elastic. Above the midpoint of a demand curve, the demand is elastic. Below the midpoint of a demand curve, the demand is inelastic. Hanan-10713