Price Elasticity of Demand What is it (in simple language)? It’s how much buyers will respond to a change in price. It’s the percentage change in quantity ÷ the percentage change in price. Example: quantity goes up 10% when price goes down 10%. 10% ÷ 10% = 1, elasticity = 1

Price Elasticity of Demand How do you calculate it? Yes, use the midpoint method. But don’t worry. Remember, on the AP test, you can’t use a calculator, so all the math is easy. Example: Price goes from $9 to $11 Quantity goes from 21 units to 19 units. Change in Quantity: 2/20 = 10% Change in Price: 2/10 = 20% Elasticity = 10/20 =.5 On the AP test, all calculations of actual elasticity coefficients will be easy – and they will be rare.

Price Elasticity of Demand Elasticity Coefficients What does it mean for demand for a product to be inelastic? (or relatively inelastic) E d < 1. What does it mean for demand for a product to be elastic? (or relatively elastic) E d > 1. What does it mean for demand for a product to be unit elastic? E d = 1.

PRICE QUANTITY OF ARTICHOKES D Elastic Inelastic Unit Elastic

PRICE QUANTITY OF ARTICHOKES D

PRICE QUANTITY OF INSULIN Demand Elasticity Coefficients: Special CasesE d = 0 Perfectly Inelastic

PRICE QUANTITY OF ? Demand Elasticity Coefficients: Special CasesE d is undefined. Perfectly Elastic

Price Elasticity of Demand Total Revenue If demand for a product is elastic (E d > 1), then an increase in price will lead to a drop in total revenue. It’s simple: if buyers respond a lot to a change in price, then they’re going to buy a lot less if you raise the price. If demand for a product is inelastic (E d < 1), an increase in price will lead to an increase in total revenue. It’s simple if buyers don’t respond a lot to a change in price, then they’re not going to buy a lot less when you raise the price. If demand for a product is unit elastic (E d = 1), an increase in price won’t affect total revenue.

Price Elasticity of Demand In class problems: Study Questions 2 – 8, 11. Homework: Read pages 363 – Explain price elasticity of supply. 2.What factors determine price elasticity of supply. 3.How is price elasticity of supply different over the market period, the short run, and the long run. Why is it different over these time periods? 4.Do study questions 12, 13, 14