Download Module 46, pp 460-464 only, Defining and Measuring Elasticity

AP Economics
Mr. Bernstein
Module 46 (pp 460-464 only):
Defining and Measuring Elasticity
October 2016
AP Economics
Mr. Bernstein
Definition of Elasticity
• Applies to the relationship between any two variables,
such as price and quantity demanded
• The Law of Demand states there is an inverse
relationship between price and quantity demanded
• Elasticity measure the responsiveness – ie we know the
quantity demanded decreases when prices increase,
but by how much?
• Examples: Gas doubles in price - what will be the effect
on driving? The price of pens double - will this change
your writing habits?
2
AP Economics
Mr. Bernstein
Definition of Elasticity, cont.
• % change in the dependent variable / % change in
the independent variable
• Aka %rdep / %rind
• Price Elasticity of Demand is % change in Quantity
Demanded / % change in Price
• Aka Ed = %rQd / %rP
3
AP Economics
Mr. Bernstein
The Midpoint Formula
• Problem: Using Ed = %rQd / %rP formula, the
Elasticity of Demand calculations will change if the
starting and ending points are reversed!!
• Example: If price rises from 100 to 110, this is
10% increase. If price drops from 110 to 100, this
is 9.1% decrease
• Solution: Use the Midpoint Formula
4
AP Economics
Mr. Bernstein
The Midpoint Formula
• %rP = 100*(New Price – Old Price) / Average Price
• %rQd = 100*(New Quantity Demanded – Old Quantity
Demanded) / Average Quantity Demanded
• Example: Rutgers raises tuition from $20,000 to $24,000
per year. The number of new freshman declines from
10,000 to 8,000. How elastic is demand?
• %rP = 100*(20,000-24,000)/22,000 = 18 and
• %rQd = 100*(10,000-8,000)/9,000 = 22
• Ed = 22 / 18, or 1.22, an elastic response between the two
points on the demand curve
• Without Midpoint Formula, Ed = 20/20, or 1.0 (unit elastic)
5