Elasticity

Calculating the Arc Elasticity If Ed > 1, demand is said to be “price elastic”. If Ed < 1, demand is said to be “price inelastic”.

%  of Qd d = %  of P Arc price elasticity for demand Curve D: The price decreases from $10 to $8 First, start with the top of the formula %  of Qd (which means) (90 – 80) = 10 = (0.117) .12 (90 + 80)/2 = 85 .12 Second, figure out the bottom formula %  of P (which means) Now Divide = (0.545) .22 (10 – 8) = 2 = (0.222) .22 (10 + 8)/2 = 9

%  of Qd d = %  of P Arc price elasticity for demand Curve D1: The price decreases from $10 to $8 (110 – 80) = 30 = 0.32 (110 + 80)/2 = 95 .32 Now Divide = 1.45 .22 (10 – 8) = 2 = 0.22 (10 + 8)/2 = 9

Practice! d = What is the arc elasticity from P = 9 to P =8? %  of Qd d = %  of P What is the arc elasticity from P = 9 to P =8? (1 – 2) = |-1| = 1 = 0.67 (1 + 2)/2 = 1.5 0.67 = 5.58 0.12 (9 – 8) = 1 = 0.12 (9 + 8)/2 = 8.5

Income of Elasticity of Demand %  of Qd d = %  of I If εI > 1, the good is normal and income elastic (a luxury). If 1 > εI > 0, the good is normal but income inelastic (a necessity). If εI < 0, the good is inferior.

So, now you know how to use the formula. Apply the same concept to these other formulas.