Elasticity describes responsiveness or sensitivity to a change

Elasticity – describes responsiveness, or sensitivity, to a change in price Price Elasticity of Demand - The ratio of the percentage change in the quantity demanded of a product to a percentage change in its price. Illustration - Supposing a university’s enrollment drops by 20% because tuition rises by 10%, what is the price elasticity of demand? Economists drop the negative sign because we know from the law of demand that quantity demanded and price are inversely related Going from 3 to 2. 5: . 5 / 0. 167 Going from 2. 5 to 3: . 5 / 2. 5 = 0. 2 Solve this problem of different base points by using the midpoints as the base points of changes in prices and quantity demanded P Q %DP %DQ Ed Total Revenue $3. 00 0 $3. 00 x 0 = $0 $2. 50 10 (2. 5 -3)/((2. 5+3)/2) (10 -0)/((10+0)/2) 200% / 18% = 11 $2. 50 x 10 = $25 $2. 00 20 (2 -2. 5)/((2+2. 5)/2) (20 -10)/((20+10)/2) 67% / 22. 2% = 3 $2. 00 x 20 = $40 $1. 50 30 (1. 5 -2)/((1. 5+2)/2) (30 -20)/((30+20)/2) 40% / 28. 6% = 1. 4 $1. 50 x 30 = $45 $1. 00 40 (1 -1. 5)/((1+1. 5)/2) (40 -30)/((40+30)/2) 28. 6% / 40% = 0. 714 $1. 00 x 4 0 = $40 $0. 50 50 (0. 5 -1)/((0. 5+1)/2) (50 -40)/((50+40)/2) 22. 2% / 67% = 0. 333 $0. 50 x 50 = $25 $0. 0 60 (0 -. 5)/((0+. 5)/2) (60 -50)/((60+50)/2) 18% / 200% = 0. 091 $0. 00 x 60 = $0 Elastic Demand (Ed > 1) – the percentage change in quantity demanded is greater than the percentage change in price (Decrease in Price leads to an increase in revenue) Inelastic Demand (Ed < 1) – the percentage change in quantity demanded is less than the percentage change in price (Decrease in Price leads to an decrease in revenue) Unitary elastic (Ed = 1) – the percentage change in quantity demanded is equal to the percentage change in price (Price change does not impact revenue) Perfectly elastic (Ed =∞) – A condition in which a small percentage change in price brings about an infinite percentage change in the quantity demanded Perfectly Inelastic (Ed =0) – A condition in which the quantity demanded does not change as the price changes Factors Influence Demand Sensitivity Price $3. 00 • Availability of substitutes • Share of budget on the product • Adjustment to a price change over time Less Elastic (Medicine) More Elastic (Candy) Elastic Unitary Elastic $2. 50 Total Revenue $45 $2. 00 $1. 50 Inelastic $1. 00 $25 $0. 50 Other Elastic ties • Income elasticity of demand • Cross-elasticity of demand 0 10 35 50 10 20 30 40 50 60 Quantity Copyright e. Study. us 2010 michael. roberson@e. Study. us