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Economics 2

Lecture 11: Price Elasticity of Demand

elasticity

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Elasticity

We want to measure the magnitude by which consumers change the quantity demanded in response to a change in the price of the product. The more elastic demand is, the more responsive it is to price changes.

                              percentage change in quantity demanded
price elasticity of demand = ----------------------------------------
                                  percentage change in price

the price elasticity of demand

• tells us the percentage change in quantity demanded resulting from a 1% change in price
• is always negative, so the negative sign is dropped

when the price elasticity of demand is

• greater than 1, demand is elastic: consumers respond a lot to a price change
• equal to 1, demand is unit elastic
• less than 1, demand is inelastic: consumers do not respond much to a change in price

Although the price elasticity of demand declines as we move down a straight-line demand curve, generally, the steeper the demand curve, the more inelastic the demand.

Along a straight line demand curve, equal changes in P mean equal changes in Q_D. But, these changes in P and Q_D do not translate into constant percentage changes. A $1 change in P at the top of the demand curve is a much smaller percentage change than a $1 change in P at the bottom of the demand curve.

David A. Latzko Business and Economics Division Pennsylvania State University, York Campus office: 13 Main Classroom Building voice: (717) 771-4115 fax: (717) 771-4062 e-mail: web: www.yk.psu.edu/~dxl31