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About IB Economics. The Syllabus. Assessment Objectives (AO) IB Definitions List. Contact . Home. Introduction ... IB Econ Teacher Support Definitions.pdf Google ...
- Overview
- Key points
- What is price elasticity?
- Using the midpoint method to calculate elasticity
- Using the point elasticity of demand to calculate elasticity
- Calculating price elasticity of demand
- Calculating the price elasticity of supply
- Summary
- Self-check questions
- Review Questions
How do quantities supplied and demanded react to changes in price?
•Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It is computed as the percentage change in quantity demanded—or supplied—divided by the percentage change in price.
•Elasticity can be described as elastic—or very responsive—unit elastic, or inelastic—not very responsive.
•Elastic demand or supply curves indicate that the quantity demanded or supplied responds to price changes in a greater than proportional manner.
•An inelastic demand or supply curve is one where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied.
•Unitary elasticity means that a given percentage change in price leads to an equal percentage change in quantity demanded or supplied.
•Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It is computed as the percentage change in quantity demanded—or supplied—divided by the percentage change in price.
•Elasticity can be described as elastic—or very responsive—unit elastic, or inelastic—not very responsive.
•Elastic demand or supply curves indicate that the quantity demanded or supplied responds to price changes in a greater than proportional manner.
•An inelastic demand or supply curve is one where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied.
Both demand and supply curves show the relationship between price and the number of units demanded or supplied. Price elasticity is the ratio between the percentage change in the quantity demanded, Qd , or supplied, Qs , and the corresponding percent change in price.
The price elasticity of demand is the percentage change in the quantity demanded of a good or service divided by the percentage change in the price. The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price.
Elasticities can be usefully divided into five broad categories: perfectly elastic, elastic, perfectly inelastic, inelastic, and unitary. An elastic demand or elastic supply is one in which the elasticity is greater than one, indicating a high responsiveness to changes in price. An inelastic demand or inelastic supply is one in which elasticity is less than one, indicating low responsiveness to price changes. Unitary elasticities indicate proportional responsiveness of either demand or supply.
Perfectly elastic and perfectly inelastic refer to the two extremes of elasticity. Perfectly elastic means the response to price is complete and infinite: a change in price results in the quantity falling to zero. Perfectly inelastic means that there is no change in quantity at all when price changes.
To calculate elasticity, instead of using simple percentage changes in quantity and price, economists sometimes use the average percent change in both quantity and price. This is called the Midpoint Method for Elasticity:
Midpoint method for elasticity=Q2−Q1(Q2+Q12)P2−P1(P2+P12)
A drawback of the midpoint method is that as the two points get farther apart, the elasticity value loses its meaning. For this reason, some economists prefer to use the point elasticity method. In this method, you need to know what values represent the initial values and what values represent the new values.
Point elasticity =new Q−initial Qinitial Qinitial P−new Pinitial P
Let’s apply these formulas to a practice scenario. We'll calculate the elasticity between points A and B in the graph below.
First, apply the formula to calculate the elasticity as price decreases from $70 at point B to $60 at point A :
% changeinquantity=3,000–2,800(3,000+2,800)/2 × 100=2002,900 × 100=6.9%changeinprice=60–70(60+70)/2 × 100=–1065 × 100=–15.4Price elasticity of demand= 6.9%–15.4%=0.45
The elasticity of demand between point A and point B is 6.9%–15.4% , or 0.45. Because this amount is smaller than one, we know that the demand is inelastic in this interval.
[Wait a minute! Shouldn't the price elasticity of demand be negative here?]
This means that, along the demand curve between point B and point A , if the price changes by 1%, the quantity demanded will change by 0.45%. A change in the price will result in a smaller percentage change in the quantity demanded. For example, a 10% increase in the price will result in only a 4.5% decrease in quantity demanded. A 10% decrease in the price will result in only a 4.5% increase in the quantity demanded.
Now let's try calculating the price elasticity of supply. We use the same formula as we did for price elasticity of demand:
Price elasticity of supply=% change in quantity% change in price
Assume that an apartment rents for $650 per month and, at that price, 10,000 units are rented—you can see these number represented graphically below. When the price increases to $700 per month, 13,000 units are supplied into the market.
By what percentage does apartment supply increase? What is the price sensitivity?
We'll start by using the Midpoint Method to calculate percentage change in price and quantity:
% change in quantity=13,000–10,000(13,000+10,000)/2 × 100=3,00011,500 × 100=26.1% change in price=$700–$650($700+$650)/2 × 100=50675 × 100=7.4
•Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It is computed as the percentage change in quantity demanded—or supplied—divided by the percentage change in price.
•Elasticity can be described as elastic—or very responsive—unit elastic, or inelastic—not very responsive.
•Elastic demand or supply curves indicate that the quantity demanded or supplied responds to price changes in a greater than proportional manner.
•An inelastic demand or supply curve is one where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied.
Using the data shown in the table below about demand for smart phones, calculate the price elasticity of demand from point B to point C , point D to point E , and point G to point H . Classify the elasticity at each point as elastic, inelastic, or unit elastic.
[Show solution.]
Using the data shown in in the table below about supply of alarm clocks, calculate the price elasticity of supply from: point J to point K , point L to point M , and point N to point P . Classify the elasticity at each point as elastic, inelastic, or unit elastic.
[Show solution.]
•What is the formula for calculating elasticity?
•What is the price elasticity of demand? Can you explain it in your own words?
Using the formula for price elasticity of demand and plugging in values for the estimate of price elasticity (−0.5) and the percentage change in price (5%) and then rearranging terms, we can solve for the percentage change in quantity demanded as: e D = %Δ in Q/%Δ in P; −0.5 = %Δ in Q/5%; (−0.5)(5%) = %Δ in Q = −2.5%.
Feb 26, 2017 · Definition, formula, examples and diagrams to explain elasticity of demand/supply. Inelastic and elastic. Importance of elasticity. Income elasticity and different goods.
6 days ago · An authoritative and comprehensive dictionary containing 2,500 key economic terms with clear, concise definitions. It covers all aspects of economics including economic theory, applied microeconomics and macroeconomics, labour economics, public economics and public finance, monetary economics, environmental economics, and many others.
Economic terms, from “absolute advantage” to “zero-sum game”, explained to you in plain English. A concept that helps to explain international trade.
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When the price rises, quantity demanded falls for almost any good (law of demand), but it falls more for some than for others. The price elasticity gives the percentage change in quantity demanded when there is a one percent increase in price, holding everything else constant.
