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Attribution Non-Commercial (BY-NC)

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quantity demanded responds to a change in price.

relatively larger change in quantity demanded.

relatively smaller change in the quantity demanded.

Demand Elasticity

Variation of Elastic Unit Elastic Inelastic

Price > 1 = 1 <1

Increase of Decrease of Expense Increase of

price Expense doesn’t change Expense

Decrease of Increase of Expense Decrease of

price Expense doesn’t change Expense

Initial Price = P1

Final Price = P2

Initial Quantity = Q1

Final Quantity= Q2

(Q2 - Q1)

PEoD = (Q1 + Q2) / 2

(P2 – P1)

(P1 + P2) / 2

absolute value, so we ignore the negative value.

Examples:

PEoD = (Q1 + Q2) / 2 = (2+4) /2 = 3 = .666 = -1.6

(P2 – P1) (2-3) -1 -.4

(P1 + P2) / 2 (3+2)/2 2.5

= | -1.6 | = 1.6

Here you can prove the demand is inelastic because:

PEoD = (Q1 + Q2) / 2 = (2+2.5) /2 = 2.25 = .2222 = -.55

(P2 – P1) (2-3) -1 -.4

(P1 + P2) / 2 (3+2)/2 2.5

= | -.55 | = .55

Here you can prove the demand is unit elastic because:

PEoD = (Q1 + Q2) / 2 = (2+3) /2 = 2.5 = 4 = -1

(P2 – P1) (2-3) -1 -4

(P1 + P2) / 2 (3+2)/2 2.5

= | -1 | = 1

Answers to Homework

Airlines in the United States generally do not offer reduced

round-trip airfares during holidays such as Easter,

Thanksgiving, and Christmas. What can you conclude about

the elasticity of demand for airplane travel at these times?

Inelastic. If you are willing to travel by plane in these dates, you will

buy the ticket no matter which is the price.

Inelastic demand says that an increase in price means an increase

in expense, and a decrease in price means a decrease in expense.

$2.00 to $2.50. As a result, its sales of hamburgers fell from 200

per day to 180 per day. Was the demand for its hamburgers

elastic or inelastic? Why?

the increase in price caused an increase in total expenditure.

Proof:

Q1= 200

Q2= 180

P1= 2

P2= 2.5

(Q2 - Q1)

PEoD = (Q1 + Q2) / 2

(P2 – P1)

(P1 + P2) / 2

PEoD = (200 + 180) / 2 = 190 = -.1053 = -.474

(2.5 – 2) .5 .2222

(2 + 2.5) / 2 2.25

= | -.474 | = .474

Formula to Determine Price Elasticity of Supply

Q2 = The New Quantity Supplied

P1 = Initial Price

P2 = New Price

(Q2-Q1)

PEoS= (Q2+Q1)/2

(P2 – P1)

(P2 + P1)/2

absolute value, so we ignore the negative value.

Type of elasticity

due to a change in price

Examples:

(Q2-Q1) (6-2) 4

PEoS= (Q2+Q1)/2 = (6+2) /2 = 4 = 1 = 1.5

(P2 – P1) (2-1) 1 .666

(P2 + P1)/2 (2+1) /2 1.5

1.5 > 1 , it is elastic supply

(Q2-Q1) (3-2) 1

PEoS= (Q2+Q1)/2 = (3+2) /2 = 2.5 = .4 = .6

(P2 – P1) (2-1) 1 .666

(P2 + P1)/2 (2+1) /2 1.5

.6 < 1 , it is inelastic supply

(Q2-Q1) (4-2) 2

PEoS= (Q2+Q1)/2 = (4+2) /2 = 3= .666 = 1

(P2 – P1) (2-1) 1 .666

(P2 + P1)/2 (2+1) /2 1.5

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