## 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

#### 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.