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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

List and explain four factors of production
Vuyo Reply
capital labour entrepreneur natural resources
Thembi
What is supply
Ogodo Reply
when the supply decreases demand also decreases
Thembi
types of demand and the explanation
akin Reply
what is demand
akin Reply
other things remaining same if demend is increases supply is also decrease and if demend is decrease supply is also increases is called the demand
Mian
if the demand increase supply also increases
Thembi
you are wrong this is the law of demand and not the definition
Tarasum
Demand is the willingness of buy and ability to buy in a specific time period in specific place. Mian you are saying law of demand but not in proper way. you have to keep studying more. because its very basic things in Economics.
Hamza
Demand is the price of Quantity goods and services in which consumer's are willing and able to offer at a price in the market over a period of time
Umar
Demand is the quantity of goods and services that the consumer are willing and able to buy at a alternative prices over a given period of time. But mind you demand is quite different from need and want.
Tarasum
Demand can be defined as the graphical representation between price&demand
alkasim
sorry demand is nt a graphical representation between price and quantity demand but instead that is demand curve.
Ebrima
Demand is the willingness and ability of a consumer to buy a quantity of a good over a given period of time assuming all other things remain constant.
Vedaant
what is commercialization?
Doris Reply
How to talk loan for bank?
Alfred Reply
what is the meaning of gpa?
Ritisha Reply
Answer: GPA stands for Grade Point Average. It is a standard way of measuring academic achievement in the U.S. Basically, it goes as follows: Each course is given a certain number of "units" or "credits", depending on the content of the course.
Yusuf
what is small and Microbuisenes
tadesse Reply
What is fiscal policy
Dansofo
Who is the funder of Economic
Dansofo
founder , that is Adam Smith
Daniel
what is model
Daniel Reply
The wealth of Nations
Yusuf Reply
the wealth of nations, is it the first?
Umar
Yes very sure it was released in 1759
Yusuf
thank you Yusuf.
Umar
then when did he died?
Umar
17 July 1790 Born: 16 June 1723, Kirkcaldy, United Kingdom Place of death: Panmure House, Edinburgh, United Kingdom
Yusuf
1790
Yusuf
that's my today questions, thank you Yusuf it's bed time see u after.
Umar
what is fiscal policy
kemigisha Reply
what's mode?
Umar Reply
mode is the highest occurring frequency in a distribution
Bola
mode is the most commonly occurring item in a set of data.
Umar
Please, what is the difference between monopoly and monopsony?
Olaleye Reply
is there monopsony word?
Umar
I have no idea though
Umar
please, in which year Adam smith was born?
Umar
monopsony is when there's only one buyer while monopoly is when there's only one producer.
Bola
who have idea on Banter
Ibrahim
like trade by barter?
Bola
Monopoly is when there's excessively one seller and there is no entry in the market while monopsony is when there is one buyer
kemigisha
Adam smith was born in 1723
Bola
 (uncountable) Good humoured, playful, typically spontaneous conversation. verb (intransitive) To engage in banter or playful conversation. (intransitive) To play or do something amusing. (transitive) To tease mildly.
Umar
which book Adam smith published first? the first book of Adam smith pls.
Umar
wealth on nation, 1776
Daniel
what is market power and how can it affect an economy?
Gab Reply
market power:- where a firm is said to be a price setter.market power benefits the powerful at the expense of others.
Umar
Market power refers to the ability of a firm (or group of firms) to raise and maintain price above the level that would prevail under competition is referred to as market or monopoly power. The exercise of market power leads to reduced output and loss of economic welfare
Kartheek
find information about the national budget
Molahlegi
three branches of economics in which tourism is likely to figure
Makgotso Reply
What are those three branches?
IlRegno

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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