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Calculating Price Elasticity of DemandCalculating the Price Elasticity of Demand Example \(\PageIndex{1}\): Finding the Price Elasticity of DemandIs the elasticity the slope?Key Concepts and SummaryGlossaryelastic demandwhen the elasticity of demand is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in priceelastic supplywhen the elasticity of either supply is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in priceelasticityan economics concept that measures responsiveness of one variable to changes in another variableinelastic demandwhen the elasticity of demand is less than one, indicating that a 1 percent increase in price paid by the consumer leads to less than a 1 percent change in purchases (and vice versa); this indicates a low responsiveness by consumers to price changesinelastic supplywhen the elasticity of supply is less than one, indicating that a 1 percent increase in price paid to the firm will result in a less than 1 percent increase in production by the firm; this indicates a low responsiveness of the firm to price increases (and vice versa if prices drop)price elasticitythe relationship between the percent change in price resulting in a corresponding percentage change in the quantity demanded or suppliedprice elasticity of demandpercentage change in the quantity demanded of a good or service divided the percentage change in priceprice elasticity of supplypercentage change in the quantity supplied divided by the percentage change in priceunitary elasticitywhen the calculated elasticity is equal to one indicating that a change in the price of the good or service results in a proportional change in the quantity demanded or suppliedBy the end of this section, you will be able to:
Both the demand and supply curve show the relationship between price and the number of units demanded or supplied. Price elasticity is the ratio between the percentage change in the quantity demanded [latex]Q_d[/latex] or supplied ([latex]Q_s[/latex]) and the corresponding percent change in price. The price elasticity of demand is the percentage change in the quantity demanded of a good or service divided by the percentage change in the price. The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price. We can usefully divide elasticities into three broad categories: elastic, inelastic, and unitary. An elastic demand or elastic supply is one in which the elasticity is greater than one, indicating a high responsiveness to changes in price. Elasticities that are less than one indicate low responsiveness to price changes and correspond to inelastic demand or inelastic supply. Unitary elasticities indicate proportional responsiveness of either demand or supply, as Table 5.1 summarizes. Table 5.1 Elastic, Inelastic, and Unitary: Three Cases of Elasticity
Table 5.1 Elastic, Inelastic, and Unitary: Three Cases of Elasticity (Source: https://openstax.org/books/principles-microeconomics-2e/pages/1-introduction)(CC BY 4.0) To calculate elasticity along a demand or supply curve economists use the average percent change in both quantity and price. This is called the Midpoint
Method for Elasticity, and is represented in the following equations: Calculating Price Elasticity of DemandLet’s calculate the elasticity between points A and B and between points G and H as Figure 5.1 shows. First, apply the formula to calculate the elasticity as price decreases from $70 at point B to $60 at point
A: WORK IT OUTFinding the Price Elasticity of Demand Calculate the price elasticity of demand using the data in Figure 5.1 for an increase in price from G to H. Has the elasticity increased or decreased? Step 1. We know that: \[Price\;Elasticity\;of\;Demand=\frac{\%\;change\;in\;quantity}{\%change\;in\;price}\] \[\%\;change\;in\;quantity=\frac{Q_2-Q_1}{\frac{\left
(Q_2+Q_1\right )}{2}}\times 100\] Step 3. So we can use the values provided in the figure in each equation: \[\%\;change\;in\;quantity=\frac{1,600–1,800}{\frac{\left (1,600+1,800\right )}{2}} × 100\] \[Price\;Elasticity\;of\;Demand=\frac{\%\;change\;in\;quantity}{\%change\;in\;price}\] Calculating the Price Elasticity of SupplyAssume that an apartment rents for $650 per month and at that price the landlord rents 10,000 units are rented as Figure 5.2 shows. When the price increases to $700 per month, the landlord supplies 13,000 units into the market. By what percentage does apartment supply increase? What is the price sensitivity? Using the Midpoint Method, CLEAR IT UPIs the elasticity the slope? It is a common mistake to confuse the slope of either the supply or demand curve with its elasticity. The slope is the rate of change in units along the curve, or the rise/run (change in y over the change in x). For example, in Figure 5.2, at each point shown on the demand curve, price drops by $10 and the number of units demanded increases by 200 compared to the point to its left. The slope is –10/200 along the entire demand curve and does not change. The price elasticity, however, changes along the curve. Elasticity between points A and B was 0.45 and increased to 1.47 between points G and H. Elasticity is the percentage change, which is a different calculation from the slope and has a different meaning. When we are at the upper end of a demand curve, where the price is high and the quantity demanded is low, a small change in the quantity demanded, even in, say, one unit, is pretty big in percentage terms. A change in the price of, say, a dollar, is going to be much less important in percentage terms than it would have been at the bottom of the demand curve. Likewise, at the bottom of the demand curve, that one unit change when the quantity demanded is high will be small as a percentage. Thus, at one end of the demand curve, where we have a large percentage change in quantity demanded over a small percentage change in price, the elasticity value would be high, or demand would be relatively elastic. Even with the same change in the price and the same change in the quantity demanded, at the other end of the demand curve the quantity is much higher, and the price is much lower, so the percentage change in quantity demanded is smaller and the percentage change in price is much higher. That means at the bottom of the curve we’d have a small numerator over a large denominator, so the elasticity measure would be much lower, or inelastic. As we move along the demand curve, the values for quantity and price go up or down, depending on which way we are moving, so the percentages for, say, a $1 difference in price or a one unit difference in quantity, will change as well, which means the ratios of those percentages and hence the elasticity will change. What is the midpoint formula for elasticity of demand?Midpoint Price = (P1 + P2) / 2 = (10 + 8) / 2 = 9. % change in qty demanded = (60 – 40) / 50 = 0.4. % change in price = (8 – 10) / 9 = -0.22. Arc Ed = 0.4 / -0.22 = 1.82.
Is demand unit elastic at the midpoint?The unit elastic demand is at the midpoint of the demand curve. The bottom half of the curve shows an inelastic demand because if the price rises, at any quantity below the midpoint, the expenditure increases despite the fact that the quantity is falling. At the top half of the diagram, the curve is elastic.
What is price elasticity at midpoint?To calculate elasticity along a demand or supply curve economists use the average percent change in both quantity and price. This is called the Midpoint Method for Elasticity, and is represented in the following equations: %changeinquantity=Q2−Q1(Q2+Q1)2×100. %changeinprice=P2−P1(P2+P1)2×100.
What is unit elastic formula?To calculate elasticity, take the percentage change in either demand or supply and divide it by the percent change in price. The resulting number is the goods elasticity value. If the number is equal to 1, then the good is unit elastic.
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