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Man Eco
ELASTICITY
Change in Qd = Q2 – Q1 or 5 pounds
To compute for % change in Qd = Change in Qd/Q2 x 100%
= Q2 – Q1/Q2 x 100%
Q2 = 10
Q1 = 5
% change in Qd = 10 – 5/5 x 100%
= 5/5 x 100% = 100% perfect increase
To compute for % change in P = Change in price/P1 x
100%
= P2 – P1/P1 x100%
P2 = 2
P1 = 3
% change in P = 2 – 3/3 x 100%
= -1/3 x 100% = -33.3% decline
Price elasticity of demand = %ΔQd/%ΔP
= +100/-33.3
= -3.0 Demand is elastic
Calculating Price Elasticity with
the Midpoint Formula
More PRECISE way of calculating
percentages using the value HALFWAY
between P1 and P2 for the BASE in calculating
the PERCENTAGE CHANGE IN PRICE and the
HALFWAY between Q1 and Q2 as the BASE for
calculating the CHANGE PERCENTAGE IN
QUANTITY DEMANDED
Percentage Change in Quantity demanded
(%ΔQd)
To compute for % change in Qd = Change in Qd/Q1 +
Q2/2 x 100%
= Q2 – Q1/Q1 + Q2/2 x 100%
Q2 = 10
Q1 = 5
% change in Qd = 10 – 5/ (5 + 10)/2 x 100%
= 5/7.5 x 100% = 66.7%
To compute for % change in Qd = Change in P/P1 + P2/2 x
100%
= P2 – P1/P1 + P2/2 x 100%
P1 = 3
P2 = 2
% change in Qd = 2 – 3/ (3 + 2)/2 x 100%
= -1/2.5 x 100% = 40.0%
Price elasticity of demand = %ΔQd/%ΔP
= 66.7/40.0
= -1.67 Demand is elastic
•
Elasticity changes along a Straight-Line
Demand Curve
Elasticity of Demand
= percentage change in quantity demanded/percentage change
in price
Elasticity and Total Revenue
Features of elasticity
Knowing the value of price elasticity allows us to quickly see what happens to a firm's revenue as it raises
and cuts its prices.
When demand is inelastic, raising prices will raise revenues; when demand is elastic, price increases,
reduce revenues.
TOTAL REVENUE
= Price × quantity
[ ] Availability of Substitutes
The more possible substitutes there are for a given good or service, the greater the
elasticity.
When several close substitutes are available, customers can easily switch from one
good to another even if there is only a small change in price.
Conversely, if no substitutes are available, demand for a good is more likely to be
inelastic.