Overview
This lecture explains the difference between elastic and inelastic demand, introduces unitary elasticity, and uses examples to show how elasticity can vary along the same demand curve.
Price Elasticity of Demand: The Basics
- Price elasticity of demand = (% change in quantity demanded) / (% change in price).
- If % change in quantity demanded > % change in price, demand is elastic.
- If % change in quantity demanded < % change in price, demand is inelastic.
- If % change in quantity demanded = % change in price, demand is unitary (unitary elastic).
Interpreting Elasticity Values
- Elastic demand: elasticity (in magnitude) > 1; consumers are highly responsive to price changes.
- Inelastic demand: elasticity (in magnitude) < 1; consumers are less responsive to price changes.
- Unitary elastic demand: elasticity (in magnitude) = 1; percentage change in quantity equals percentage change in price.
Example Calculations
- Example 1: Price drops from $70 to $60, quantity increases from 2800 to 3000; elasticity = -0.45 (inelastic).
- Example 2: Price drops from $130 to $120, quantity increases from 1600 to 1800; elasticity = -1.47 (elastic).
- The significance of a price change depends on its size relative to the original price (percentages matter, not just dollar amount).
Elasticity Along the Same Demand Curve
- A linear (straight-line) demand curve has both elastic and inelastic regions.
- Lower price ranges often show inelastic demand; higher price ranges often show elastic demand.
- Elasticity should be discussed over the relevant price range for meaningful comparison.
Key Terms & Definitions
- Elastic Demand — Demand where % change in quantity > % change in price (elasticity > 1 in magnitude).
- Inelastic Demand — Demand where % change in quantity < % change in price (elasticity < 1 in magnitude).
- Unitary Elastic Demand — Demand where % change in quantity = % change in price (elasticity = 1 in magnitude).
- Linear Demand Curve — A straight-line demand curve with both elastic and inelastic portions.
Action Items / Next Steps
- Practice calculating elasticity using different price and quantity changes.
- Review how elasticity can change across a single demand curve.
- Prepare for discussion on polar (extreme) cases of elasticity in the next session.