Elasticity of Demand

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Elasticity of Demand Supply
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• Businesses need to measure the responsiveness of
  quantity demanded to price so that they can
• Make decisions on pricing of products
• and/or
• Whether to develop new models of their product

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They measure elasticity by means of a concept
called elasticity
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Demand

• A curve indicating a sharp response to change in
  price is said to be elastic
• A curve involving a small response to change in
  price is called inelastic

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(Price) Elasticity of Demand

• The ratio of the percentage change in quantity
  demanded to the percentage change in price
• Elasticity of Demand change in quantity
  demanded
• change in price
• ie. Gas station sells 10 million litres/month at
  .50, raise price to .54/litre, quantity
  demanded drops to 9.5 million litres

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Calculating per cent change in quantity

• Use the average between the original quantity
  sold and the quantity after the price change
• ie. Demand fell from 10 to 9.5, the average
  quantity demanded is 9.75. Change in quantity is
  -0.5
• Per cent change demanded is
• -0.5 x 100 -5.128 or 5.13
• 9.75
• This number serves as the numerator

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Calculating per cent change in price

• Original price was .50, increased to .54
• Difference of .04
• Average price is .52
• The per cent change in price in this example is
• 4 x 100 7.69
• 52
• This number serves as the denominator

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Coefficient of Demand

• Now we can use the formula to determine the
  coefficient of demand
• QD 5.13 0.667 or 0.67
• PD 7.69
• The answer is known as the coefficient of demand

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Can we use Slope as a Determinant of Elasticity?

• May seem that the slope of the demand curve
  conveys information we need
• But slope wont do the job because it depends on
  the units of measurement
• Since there are no standardized units of
  measurement, economists use the elasticity
  measure because it deals with percentage changes
  in price quantity

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Elasticity Formula

• The elasticity formula solves the units problem
  because percentages are unaffected by units of
  measurement
• Ex. If your height doubles between ages 5 and 15,
  it goes up 100 percent whether measured in inches
  or in centimetres

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