Introduction to Elasticity

Read this chapter to learn about the concept of elasticity. Be sure to read all the sections in this chapter (Sections 5.1-5.4) following the introduction.

5.1 Price Elasticity of Demand and Price Elasticity of Supply

WORK IT OUT

Finding the Price Elasticity of Demand

Calculate the price elasticity of demand using the data in Figure 5.2 for an increase in price from G to H. Has the elasticity increased or decreased?

Step 1. We know that:

$\text { Price Elasticity of Demand }=\frac{\% \text { change in quantity }}{\% \text { change in price }}$

Step 2. From the Midpoint Formula we know that:

$\begin{array}{l} \% \text { change in quantity } &=\frac{Q_{2}-Q_{1}}{\left(Q_{2}+Q_{1}\right) / 2} \times 100 \\ \% \text { change in price } &=\frac{P_{2}-P_{1}}{\left(P_{2}+P_{1}\right) / 2} \times 100 \end{array}$

Step 3. So we can use the values provided in the figure in each equation:

$\begin{aligned} \% \text { change in quantity } &=\frac{1,600-1,800}{(1,600+1,800) / 2} \times 100 \\ &=\frac{-200}{1,700} \times 100 \\ &=-11.76 \\ \% \text { change in price } &=\frac{130-120}{(130+120) / 2} \times 100 \\ &=\frac{10}{125} \times 100 \\ &=8.0 \end{aligned}$

Step 4. Then, those values can be used to determine the price elasticity of demand:

$\begin{aligned} \text { Price Elasticity of Demand } &=\frac{\% \text { change in quantity }}{\% \text { change in price }} \\ &=\frac{-11.76}{8} \\ &=1.47 \end{aligned}$

Therefore, the elasticity of demand from G to H 1.47. The magnitude of the elasticity has increased (in absolute value) as we moved up along the demand curve from points A to B. Recall that the elasticity between these two points was 0.45. Demand was inelastic between points A and B and elastic between points G and H. This shows us that price elasticity of demand changes at different points along a straight-line demand curve.