ELASTICITY

ELASTICITY

Chapter – 4/2

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

At the extremes, a perfectly elastic curve will be

horizontal, and a perfectly inelastic curve will be vertical.

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

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

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

Average The New

Point The

Original

Point

P

_aver

= 20 P

₂

= 19.5 P

₁

= 20.5

The price elasticity of demand is

%DQ/ %DP = (1/5)/(1/20)

= 20/5

= 4

Price Elasticity of Demand

Hanan-107 11

. Example 2: Elasticity of Demand

 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= [(Q₂- 

Q₁) / Q_ave] / [(P₂-P₁) / P_ave]

Applying the above formula to the data given 

we get:│

[(900-1000)/950]/[(1.00-.75)/.875]│≈-0.368

Elasticity Along a straight- Line

Demand Curve

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.