Overview
This lecture covers the concept of price elasticity of demand, its calculation, interpretation, and significance in economics using simple examples and explanations.
Introduction to Price Elasticity of Demand
- Price elasticity of demand measures how sensitive quantity demanded is to a change in price.
- It is calculated as the percent change in quantity demanded divided by the percent change in price.
- Economists use price elasticity to compare how "stretchy" demand is relative to price changes, similar to a rubber band analogy.
Calculating Price Elasticity of Demand
- To calculate, use: Price Elasticity of Demand (E) = (% change in quantity) / (% change in price).
- Example 1: From point A (Q=2, P=9) to B (Q=4, P=8):
- % Change in Quantity = (4-2)/2 = 100%
- % Change in Price = (8-9)/9 ≈ -11%
- E = 100% / -11% = -9 (very elastic)
- Example 2: From point E (Q=16, P=2) to F (Q=18, P=1):
- % Change in Quantity = (18-16)/16 = 12.5%
- % Change in Price = (1-2)/2 = -50%
- E = 12.5% / -50% = -0.25 (inelastic)
Interpreting Elasticity Values
- Elasticity can vary across different points on the same linear demand curve.
- High absolute value of E (greater than 1) indicates elastic demand: quantity changes more than price.
- Low absolute value of E (less than 1) indicates inelastic demand: quantity changes less than price.
- Elasticity calculation may differ based on the starting point (direction), highlighting the method's limitation.
Key Terms & Definitions
- Price Elasticity of Demand (E) — A ratio measuring sensitivity of quantity demanded to price changes.
- Elastic Demand — When |E| > 1; quantity demanded changes significantly with price.
- Inelastic Demand — When |E| < 1; quantity demanded changes little with price.
- Percent Change — (New Value - Old Value) / Old Value × 100%.
Action Items / Next Steps
- Practice calculating price elasticity at different points on a demand curve.
- Learn and apply the midpoint method for more consistent elasticity calculations.
- Review demand curve graphs and relate elasticity values to curve segments.