<< Chapter < Page Chapter >> Page >
By the end of this section, you will be able to:
  • Calculate the price elasticity of demand
  • Calculate the price elasticity of supply

Both the demand and supply curve show the relationship between price and the number of units demanded or supplied. Price elasticity is the ratio between the percentage change in the quantity demanded (Qd) or supplied (Qs) and the corresponding percent change in price. The price elasticity of demand    is the percentage change in the quantity demanded of a good or service divided by the percentage change in the price. The price elasticity of supply    is the percentage change in quantity supplied divided by the percentage change in price.

Elasticities can be usefully divided into three broad categories: elastic, inelastic, and unitary. An elastic demand    or elastic supply    is one in which the elasticity is greater than one, indicating a high responsiveness to changes in price. Elasticities that are less than one indicate low responsiveness to price changes and correspond to inelastic demand    or inelastic supply    . Unitary elasticities indicate proportional responsiveness of either demand or supply, as summarized in [link] .

Elastic, Inelastic, and Unitary: Three Cases of Elasticity
If . . . Then . . . And It Is Called . . .
% change in quantity > % change in price % change in quantity % change in price > 1 Elastic
% change in quantity = % change in price % change in quantity % change in price = 1 Unitary
% change in quantity < % change in price % change in quantity % change in price < 1 Inelastic

Before we get into the nitty gritty of elasticity, enjoy this article on elasticity and ticket prices at the Super Bowl.

To calculate elasticity, instead of using simple percentage changes in quantity and price, economists use the average percent change in both quantity and price. This is called the Midpoint Method for Elasticity, and is represented in the following equations:

% change in quantity = Q 2 Q 1 Q 2 + Q 1 /2  × 100 % change in price = P 2 P 1 P 2 + P 1 /2  × 100

The advantage of the is Midpoint Method is that one obtains the same elasticity between two price points whether there is a price increase or decrease. This is because the formula uses the same base for both cases.

Calculating price elasticity of demand

Let’s calculate the elasticity between points A and B and between points G and H shown in [link] .

Calculating the price elasticity of demand

The graph shows a downward sloping line that represents the price elasticity of demand.
The price elasticity of demand is calculated as the percentage change in quantity divided by the percentage change in price.

First, apply the formula to calculate the elasticity as price decreases from $70 at point B to $60 at point A:

% change in quantity = 3,000 2,800 ( 3,000 + 2,800 ) /2  × 100 = 200 2,900  × 100 = 6.9 % change in price = 60 70 ( 60 + 70 ) /2  × 100 = –10 65  × 100 = –15.4 Price Elasticity of Demand =     6.9% –15.4% = 0.45

Therefore, the elasticity of demand between these two points is     6.9% –15.4% which is 0.45, an amount smaller than one, showing that the demand is inelastic in this interval. Price elasticities of demand are always negative since price and quantity demanded always move in opposite directions (on the demand curve). By convention, we always talk about elasticities as positive numbers. So mathematically, we take the absolute value of the result. We will ignore this detail from now on, while remembering to interpret elasticities as positive numbers.

Questions & Answers

In the same system, men with better jobs receive larger payments. What economic principle is applicable to this situation? ​
Mary Reply
what is scarcity
Kuzivaishe Reply
How economist think?
Muhammad Reply
what's supply
Gifty Reply
what's demand
Gifty
Hi
Isaac
hi
Adil
hello
Kuzivaishe
What is scarcity
GANJER Reply
the unavailability of resources to satisfy human needs and wants
Sepiso
which book is the best book for learning economics
Jonibek Reply
factor affecting or influencing changes in supply
Sham Reply
Price of goods/commodities. Quantity demanded price of raw materials. Cost of transportation. Taste and fashion weather Government policy etc
Enoh
insecurity hoarding
Enoh
What is economics
Khurram Reply
we study how to allocate scare resouces to satisfied unlimited wants.
Adil
Scenario affecting change in income in demand
Janiz Reply
what economic
guuguule Reply
it is the situation where by im a market there is only one supplier and producer of a certain comodity that has no close substitute or competitor
Sepiso Reply
yes
Alhaji
what is demand and supply
Alhaji
demand is the amount of a goods or service that consumers are willing to buy at a particular price, while is to provide something,to make something available for use.
jago
I need a scenario affecting change in income (demand)
Janiz
what is Economics?
Pintu Reply
Is the study of human behaviour as a relationship between ends and scares mean which have alternative use
Alhaji
yes
Tawa
what is monopoly
Alhaji
what are the difficultés if retail prix index for calculating thé value of money
Oscar
hmm OK wait
Castino
what is labour
Mamudou Reply
LABOUR is a measure of work done by human being
Blessing
It is all form of human effort use to utilize in production
Alhaji
Why is scarcity a foundermental problem in economics
Alhaji
Why is scarcity a foundermental problem in economics
Alhaji Reply
scarcity occur unbalance demand and supply at this time cost goods increase then inflation very increase
Tesfaye
scarcity is a foundermental problem because its a natural situation and it affects the world at Large.in other words,it's limit in supply relating to deman
Akwosih
'Economics is about making choices in the presence of scarcity"
manoj Reply
. 'Economics is about making choices in the presence of scarcity" - Dscuss.
manoj

Get the best Principles of economics course in your pocket!





Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Principles of economics' conversation and receive update notifications?

Ask