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

2. 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)

3. AP Economics Mr. Bernstein
Examples of Perfectly Inelastic and Elastic Curves
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4. 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

5. 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

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

7. 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

8. 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