2. Economics 100 Lecture 8 Elasticity

3. Elasticity  Price elasticity of demand  Calculating the price elasticity of demand

4. Price Elasticity of Demand  A measure of the responsiveness of the quantity demanded to price holding other things constant

5. Price Elasticity of Demand  Figure 5.1 (a) shows the case in which a cut in supply increases total revenue

6. Price Elasticity of Demand  Figure 5.1 (b) shows the case in which that same cut in supply decreases total revenue

7. Price Elasticity of Demand  Whether total revenue increases or decreases with a price change depends on how sensitive the quantity demanded is to a change in price  We would like to derive a measure of that sensitivity...

8. Price Elasticity of Demand  The slope of a demand curve is a measure of the responsiveness of the quantity demanded of a good to a change in its price, holding constant all other influences on the quantity demanded  Problem: slope depends on units of measurement!!!!!!!!!! (we cannot compare the demand for pizza and the demand for books!!!)

9. Price Elasticity of Demand  Solution: Price elasticity of demand  The price elasticity of demand is the percentage change in the quantity demanded of a good divided by the percentage change in its price  Elasticity does not depend on units of measurement!!!

10. Calculating the Price Elasticity of Demand %  Q -------------- %  P

11. Note for ECON 100  IN ECON 100 we will calculate percentages of the average price and average quantity to avoid different numbers for a price rise and price fall  This means that we really calculate the elasticity at a point midway between the equilibrium point before and after the price change. Ideally, we would want to calculate it at a single point, with no approximations…

12. %  Q  Q/ Q ave ------- = ----------- %  P  P/ P ave

13. Calculating the Price Elasticity of Demand

15.  Negative sign  Price increase (a positive change in price) leads to a  Quantity decrease (a negative change in quantity)  The formula uses the absolute value of these changes and does not attach the minus sign to the decrease in quantity

16. ELASTICITY  Note that the price-elasticity of demand is UNIT-FREE!!!, which is very useful for comparisons!  Between countries  between goods  over time

17. Next, more about elasticities