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Elasticity of Demand
AP Microeconomics
Rixie
Unit 2, Day 1
The Law of Demand tells us that we will buy
less of a product if the price increases, but how
much less?
Price Elasticity of Demand
• A way to measure the responsiveness or sensitivity of consumers
to a price change
Ed = (%
in quantity demanded of good X) / (%
in price of good X)
• Note: when calculating elasticity of demand (Ed), you should use the
absolute value of your final answer.
• The greater this ratio, the more responsive consumers are to a change
in price of good X.
• Price elastic – the consumer is generally responsive to a change in price
• Price inelastic – the consumer is generally unresponsive to a change in
price
Range of Price Elasticity
Practice
If the price of corn rises 5 percent and the
quantity demanded for corn falls 1 percent, then
A. Ed = 5 and demand is price elastic
B. Ed= 1/5 and demand is price elastic
C. Ed= 5 and demand is price inelastic
D. Ed= 1/5 and demand is price inelastic
E. Ed = 5 and corn is unit elastic
The answer is D!
Practice problems for your notes:
1. The price of a laptop computer increases by 10%, and we observe
a 20% decrease in quantity demanded.
2. The price of a pack of gum increases by 10%, and we observe a
5% decrease in quantity demanded.
3. The price of oranges increases by 5%, and the quantity demanded
decreases by 5%.
Midpoint Formula
(used when moving point to point along a
curve)
• Allows us to calculate the
same thing (elasticity of
demand) as the previous
formula, but is more
precise when given
numerical data to work
with rather than
percentages.
Midpoint Formula Practice Problem
• At the initial price of $10, the quantity demanded of Good X is
100. When the price rises to $20, the quantity demanded falls to
90. What is the elasticity? (note – you should still use the absolute value
of your final answer)
Ed = (90-100)
(90+100)/2
(20-10)
÷ (20+10)/2
• The slope of a demand curve and elasticity of demand
are NOT equivalent measures. However, the steepness of
a demand curve can indicate whether a product is
perfectly inelastic, relatively inelastic, relatively elastic, or
perfectly elastic. (see next slide)
Graphical Representation of Elasticity of Demand
Total Revenue
• Total Revenue (TR) is equal to price times quantity:
TR = P x Q
How does TR relate to elasticity?
The Total Revenue Test
• If you know that the demand for good X is elastic, TR and
P (price) will change in opposite directions. (Ex: price
increases, so total revenue decreases)
• If you know that the demand for good X is inelastic, TR
and P will change in the same direction.
• If you know that the demand for good X is unit elastic, TR
will not change with the change in price.
Classwork – p. 370 #2, 4, & 5
(to be continued next class)