Both the demand and supply curve present the relationship in between price and the number of units demanded or supplied. Price elasticity is the ratio between the percentage readjust in the quantity demanded (Qd) or provided (Qs) and also the corresponding percent adjust in price. The price elasticity the demand is the percentage change in the amount demanded that a an excellent or business divided through the percentage adjust in the price. The price elasticity that supply is the percentage adjust in amount supplied divided by the percentage adjust in price.

You are watching: Suppose the value of the price elasticity of demand is -3. what does this mean?

Elasticities have the right to be usefully split into three large categories: elastic, inelastic, and also unitary. An elastic demand or elastic supply is one in i m sorry the elasticity is higher than one, indicating a high responsiveness to transforms in price. Elasticities that are much less than one suggest low responsiveness to price changes and correspond to inelastic demand or inelastic supply. Unitary elasticities suggest proportional responsiveness of either need or supply, as summarized in Table 1.

If . . .Then . . .And the Is called . . .
\%\;change\;in\;quantity > \%\;change\;in\;price\frac\%\;change\;in\;quantity\%\;change\;in\;price) > 1Elastic
\%\;change\;in\;quantity = \%\;change\;in\;price\frac\%\;change\;in\;quantity\%\;change\;in\;price) = 1Unitary
\%\;change\;in\;quantity

Before we acquire into the nitty gritty that elasticity, gain this write-up on elasticity and ticket price at the super Bowl.

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To calculation elasticity, instead of using simple percentage alters in quantity and also price, financial experts use the mean percent readjust in both quantity and also price. This is dubbed the Midpoint method for Elasticity, and is represented in the adhering to equations:


= l}\%\;change\;in\;quantity & \frac Q _ 2 - Q _ 1 ( Q _ 2 + Q _ 1 )/2 \times 100 \\<1em> \%\;change\;in\;price & \frac ns _ 2 - p _ 1 ( p _ 2 + p _ 1 )/2 \times 100 \endarray

The benefit of the is Midpoint Method is the one obtains the very same elasticity between two price points whether over there is a price boost or decrease. This is since the formula supplies the very same base for both cases.

Calculating Price Elasticity of Demand

Let’s calculation the elasticity in between points A and also B and also between points G and also H shown in number 1.

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Figure 1. Calculating the Price Elasticity that Demand. The price elasticity of demand is calculated together the percentage adjust in quantity divided by the percentage adjust in price.

First, use the formula to calculation the elasticity as price decreases from $70 at point B to $60 at point A:


= l}\%\;change\;in\;quantity & \frac 3,000 - 2,800 ( 3,000 + 2,800 )/2 \times 100 \\<1em> & \frac 200 2,900 \times 100 \\<1em> & = 6.9 \\<1em> \%\;change\;in\;price & \frac 60 - 70 ( 60 + 70 )/2 \times 100 \\<1em> & \frac -10 65 \times 100 \\<1em> & -15.4 \\<1em> Price\;Elasticity\;of\;Demand & \frac 6.9\% -15.4\% \\<1em> & 0.45 \endarray

Therefore, the elasticity of demand in between these 2 points is \frac 6.9\% -15.4\%  which is 0.45, one amount smaller sized than one, showing that the need is inelastic in this interval. Price elasticities of demand are always negative since price and quantity demanded constantly move in opposite direction (on the need curve). By convention, we always talk around elasticities as hopeful numbers. Therefore mathematically, we take the absolute worth of the result. We will overlook this information from now on, when remembering to analyze elasticities as confident numbers.

This way that, along the demand curve between suggest B and A, if the price changes by 1%, the amount demanded will change by 0.45%. A change in the price will result in a smaller percentage change in the quantity demanded. Because that example, a 10% increase in the price will result in just a 4.5% decrease in amount demanded. A 10% decrease in the price will an outcome in just a 4.5% increase in the amount demanded. Price elasticities of need are negative numbers indicating the the demand curve is bottom sloping, however are check out as absolute values. The adhering to Work it Out attribute will walk you with calculating the price elasticity that demand.


Finding the Price Elasticity that Demand

Calculate the price elasticity of demand using the data in figure 1 for boost in price from G to H. Has actually the elasticity raised or decreased?

Step 1. We recognize that:


Price\;Elasticity\;of\;Demand = \frac \%\;change\;in\;quantity \%\;change\;in\;price
= l}\%\;change\;in\;quantity & \frac Q _ 2 - Q _ 1 ( Q _ 2 + Q _ 1 )/2 \times 100 \\<1em> \%\;change\;in\;price & \frac p _ 2 - ns _ 1 ( ns _ 2 + ns _ 1 )/2 \times 100 \endarray
= l}\%\;change\;in\;quantity & \frac 1,600 - 1,800 ( 1,600 + 1,800 )/2 \times 100 \\<1em> & \frac -200 1,700 \times 100 \\<1em> & -11.76 \\<1em> \%\;change\;in\;price & \frac 130 - 120 ( 130 + 120 )/2 \times 100 \\<1em> & \frac 10 125 \times 100 \\<1em> & 8.0 \endarray
= l}Price\;Elasticity\;of\;Demand & \frac \%\;change\;in\;quantity \%\;change\;in\;price \\<1em> & \frac -11.76 8 \\<1em> & 1.47 \endarray

Therefore, the elasticity of demand from G to H 1.47. The size of the elasticity has increased (in absolute value) as we moved up follow me the demand curve from points A to B. Recall that the elasticity in between these 2 points to be 0.45. Demand was inelastic in between points A and B and also elastic between points G and also H. This reflects us the price elasticity the demand changes at different points along a straight-line need curve.


Calculating the Price Elasticity the Supply

Assume the an apartment rental fees for $650 every month and also at that price 10,000 units room rented as shown in number 2. Once the price boosts to $700 per month, 13,000 units space supplied right into the market. By what percent does apartment it is provided increase? What is the price sensitivity?

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Figure 2. Price Elasticity that Supply. The price elasticity of it is provided is calculated together the percentage change in quantity divided by the percentage change in price.

Using the Midpoint Method,


= l}\%\;change\;in\;quantity & \frac 13,000 - 10,000 ( 13,000 + 10,000 )/2 \times 100 \\<1em> & \frac 3,000 11,500 \times 100 \\<1em> & 26.1 \\<1em> \%\;change\;in\;price & \frac \$700 - \$650 ( \$700 + \$650 )/2 \times 100 \\<1em> & \frac 50 675 \times 100 \\<1em> & 7.4 \\<1em> Price\;Elasticity\;of\;Demand & \frac 26.1\% 7.4\% \\<1em> & 3.53 \endarray

Again, just like the elasticity the demand, the elasticity of it is provided is not followed by any kind of units. Elasticity is a ratio of one percentage readjust to an additional percentage change—nothing more—and is read as an pure value. In this case, a 1% rise in price causes boost in quantity offered of 3.5%. The higher than one elasticity of supply way that the percentage readjust in quantity gave will be higher than a one percent price change. If you"re starting to wonder if the ide of slope fits right into this calculation, check out the following Clear It up box.


Is the elasticity the slope?

It is a typical mistake to confused the slope of either the supply or need curve with its elasticity. The slope is the price of readjust in devices along the curve, or the rise/run (change in y over the adjust in x). For example, in figure 1, each point shown top top the demand curve, price fall by $10 and the number of units demanded rises by 200. For this reason the slope is –10/200 along the entire demand curve and also does not change. The price elasticity, however, changes along the curve. Elasticity between points A and also B to be 0.45 and increased come 1.47 between points G and H. Elasticity is the percentage change, which is a different calculation native the slope and also has a various meaning.

When we room at the upper finish of a need curve, whereby price is high and the quantity demanded is low, a small change in the amount demanded, also in, say, one unit, is pretty big in percentage terms. A change in price of, say, a dollar, is going to be much less vital in portion terms 보다 it would certainly have gone to the bottom that the demand curve. Likewise, at the bottom that the need curve, the one unit readjust when the quantity demanded is high will certainly be little as a percentage.

So, at one finish of the demand curve, where we have a big percentage readjust in quantity demanded over a little percentage readjust in price, the elasticity value would be high, or demand would be fairly elastic. Even with the same adjust in the price and the same change in the amount demanded, in ~ the other end of the demand curve the quantity is much higher, and the price is lot lower, therefore the percentage readjust in amount demanded is smaller and also the percentage adjust in price is lot higher. That method at the bottom the the curve we"d have actually a tiny numerator end a huge denominator, therefore the elasticity measure would be lot lower, or inelastic.

As we relocate along the need curve, the worths for quantity and price go up or down, depending on which way we are moving, therefore the percentages for, say, a $1 difference in price or a one unit difference in quantity, will change as well, which means the ratios that those percentages will change.


Key Concepts and Summary

Price elasticity steps the responsiveness that the amount demanded or supplied of a great to a change in that is price. The is computed as the percentage change in quantity demanded (or supplied) separated by the percentage readjust in price. Elasticity have the right to be described as elastic (or very responsive), unit elastic, or inelastic (not really responsive). Elastic need or supply curves indicate that amount demanded or offered respond come price alters in a greater than proportional manner. One inelastic demand or it is provided curve is one wherein a provided percentage readjust in price will cause a smaller sized percentage readjust in amount demanded or supplied. A unitary elasticity method that a provided percentage readjust in price leads to an same percentage adjust in amount demanded or supplied.


Review Questions

What is the formula for calculating elasticity?What is the price elasticity that demand? have the right to you define it in your very own words?What is the price elasticity of supply? have the right to you describe it in your very own words?

Critical reasoning Questions

Transatlantic air take trip in service class has an estimated elasticity of demand of 0.40 much less than transatlantic air take trip in economic situation class, with an estimated price elasticity of 0.62. Why carry out you think this is the case?What is the relationship between price elasticity and also position on the demand curve? because that example, as you relocate up the demand curve to higher prices and lower quantities, what happens to the measure up elasticity? just how would you explain that?

Problems

The equation for a demand curve is p = 48 – 3Q. What is the elasticity in moving from a quantity of 5 to a quantity of 6?The equation for a need curve is ns = 2/Q. What is the elasticity of need as price drops from 5 to 4? What is the elasticity of demand as the price falls from 9 to 8? would certainly you suppose these answers to be the same?The equation for a supply curve is 4P = Q. What is the elasticity that supply as price rises indigenous 3 to 4? What is the elasticity of supply as the price rises indigenous 7 to 8? would you expect these answers to it is in the same?The equation because that a supply curve is ns = 3Q – 8. What is the elasticity in moving from a price the 4 come a price the 7?

Glossary

elastic demandwhen the elasticity of need is better than one, describe a high responsiveness of amount demanded or offered to transforms in priceelastic supplywhen the elasticity of either supply is higher than one, describe a high responsiveness of amount demanded or provided to alters in priceelasticityan economics concept that actions responsiveness the one change to changes in another variableinelastic demandwhen the elasticity of demand is less than one, indicating the a 1 percent boost in price payment by the consumer leads to less than a 1 percent adjust in purchases (and angry versa); this indicates a low responsiveness by consumer to price changesinelastic supplywhen the elasticity of supply is much less than one, indicating that a 1 percent boost in price paid to the for sure will result in a less than 1 percent boost in production by the firm; this suggests a short responsiveness the the firm come price rises (and evil versa if price drop)price elasticitythe relationship between the percent readjust in price causing a corresponding percentage readjust in the quantity demanded or suppliedprice elasticity of demandpercentage change in the quantity demanded the a great or service divided the percentage readjust in priceprice elasticity of supplypercentage readjust in the amount supplied split by the percentage readjust in priceunitary elasticitywhen the calculation elasticity is equal to one indicating that a adjust in the price that the great or service results in a proportional adjust in the amount demanded or supplied

Solutions

Answers to Self-Check Questions

From point B to point C, price rises indigenous $70 come $80, and also Qd decreases from 2,800 to 2,600. So:
= l}\%\;change\;in\;quantity & \frac 2,600 - 2,800 ( 2,600 + 2,800 )/2 \times 100 \\<1em> & \frac -200 2,700 \times 100 \\<1em> & -7.41 \\<1em> \%\;change\;in\;price & \frac 80 - 70 ( 80 + 70 )/2 \times 100 \\<1em> & \frac 10 75 \times 100 \\<1em> & 13.33 \\<1em> Elasticity\;of\;Demand & \frac -7.41\% 13.33\% \\<1em> & 0.56 \endarray

The need curve is inelastic in this area; the is, that elasticity worth is less than one.

Answer from allude D to point E:


= l}\%\;change\;in\;quantity & \frac 2,200 - 2,400 ( 2,200 + 2,400 )/2 \times 100 \\<1em> & \frac -200 2,300 \times 100 \\<1em> & -8.7 \\<1em> \%\;change\;in\;price & \frac 100 - 90 ( 100 + 90 )/2 \times 100 \\<1em> & \frac 10 95 \times 100 \\<1em> & 10.53 \\<1em> Elasticity\;of\;Demand & \frac -8.7\% 10.53\% \\<1em> & 0.83 \endarray

The demand curve is inelastic in this area; the is, that is elasticity worth is less than one.

Answer from suggest G to point H:


= l}\%\;change\;in\;quantity & \frac 1,600 - 1,800 ( 1,600 + 1,800 )/2 \times 100 \\<1em> & \frac -200 1,700 \times 100 \\<1em> & -11.76 \\<1em> \%\;change\;in\;price & \frac 130 - 120 ( 130 + 120 )/2 \times 100 \\<1em> & \frac 10 125 \times 100 \\<1em> & 7.81 \\<1em> Elasticity\;of\;Demand & \frac -11.76\% 7.81\% \\<1em> & -1.51 \endarray

The need curve is elastic in this interval.From allude J to allude K, price rises from $8 come $9, and quantity rises native 50 to 70. So:
= l}\%\;change\;in\;quantity & \frac 70 - 50 ( 70 + 50 )/2 \times 100 \\<1em> & \frac 20 60 \times 100 \\<1em> & 33.33 \\<1em> \%\;change\;in\;price & \frac \$9 - \$8 ( \$9 + \$8 )/2 \times 100 \\<1em> & \frac 1 8.5 \times 100 \\<1em> & 11.76 \\<1em> Elasticity\;of\;Supply & \frac 33.33\% 11.76\% \\<1em> & 2.83 \endarray


The it is provided curve is elastic in this area; that is, its elasticity value is better than one.

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From point L to allude M, the price rises native $10 come $11, while the Qs rises native 80 to 88:


= l}\%\;change\;in\;quantity & \frac 88 - 80 ( 88 + 80 )/2 \times 100 \\<1em> & \frac 8 84 \times 100 \\<1em> & 9.52 \\<1em> \%\;change\;in\;price & \frac \$11 - \$10 ( \$11 + \$10 )/2 \times 100 \\<1em> & \frac 1 10.5 \times 100 \\<1em> & 9.52 \\<1em> Elasticity\;of\;Demand & \frac 9.52\% 9.52\% \\<1em> & 1.0 \endarray

The supply curve has actually unitary elasticity in this area.

From suggest N to allude P, the price rises indigenous $12 come $13, and also Qs rises native 95 to 100:


= l}\%\;change\;in\;quantity & \frac 100 - 95 ( 100 + 95 )/2 \times 100 \\<1em> & \frac 5 97.5 \times 100 \\<1em> & 5.13 \\<1em> \%\;change\;in\;price & \frac \$13 - \$12 ( \$13 + \$12 )/2 \times 100 \\<1em> & \frac 1 12.5 \times 100 \\<1em> & 8.0 \\<1em> Elasticity\;of\;Supply & \frac 5.13\% 8.0\% \\<1em> & 0.64 \endarray