## 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

#### Calculating Price Elasticity of Demand

Let's calculate the elasticity between points A and B and between points G and H shown i

Figure 5.2 Calculating 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:

\begin{aligned} \% \text { change in quantity } &=\frac{3,000-2,800}{(3,000+2,800) / 2} \times 100 \\ &=\frac{200}{2,900} \times 100 \\ &=6.9 \\ \% \text { change in price } &=\frac{60-70}{(60+70) / 2} \times 100 \\ &=\frac{-10}{65} \times 100 \\ &=-15.4 \\ \text { Price Elasticity of Demand } &=\frac{6.9 \%}{-15.4 \%} \\ &=0.45 \end{aligned}

Therefore, the elasticity of demand between these two points is $\frac{6.9 \%}{-15.4 \%}$ 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.

This means that, along the demand curve between point B and A, if the price changes by 1%, the quantity demanded will change by 0.45%. A change in the price will result in a smaller percentage change in the quantity demanded. For example, a 10% increase in the price will result in only a 4.5% decrease in quantity demanded. A 10% decrease in the price will result in only a 4.5% increase in the quantity demanded. Price elasticities of demand are negative numbers indicating that the demand curve is downward sloping, but are read as absolute values. The following Work It Out feature will walk you through calculating the price elasticity of demand.