Professional Documents
Culture Documents
to Calculate Elasticity
Applications
Basics
Restaurant
meals
prices, are very
elastic (meaning
price changes
greatly affect our
purchase of
them).
Basics
Gasoline
is
considered inelastic
(meaning price
changes have little
effect on the
quantity we buy).
Basics
Several factors that affect the
price elasticity of a good:
1. Availability of substitutes
2. The degree of necessity
3. The proportion of a purchaser's
budget consumed by the item
4. The time period involved
5. Raising productivity
Syed Arshad Hussain
Jr. Lecturer
If
% change in A
Syed Arshad Hussain
Jr. Lecturer
Chapter 4
Figure 4-1
% Change
In Quantity
Demanded
(% QD)
Insulin
+10%
0%
.0
+10%
-1%
-.1
Beef
+10%
-10%
-1.0
Unitarily elastic
Bananas
+10%
-30%
-3.0
Elastic
Product
Elasticity
(% QD %P)
Perfectly inelastic
Inelastic
Figure 5.2(a) shows a perfectly inelastic demand curve for insulin. Price elasticity of demand
is zero. Quantity demanded is fixed; it does not change at all when price changes.
Figure 5.2(b) shows a perfectly elastic demand curve facing a wheat farmer. A tiny price
increase drives the quantity demanded to zero. In essence, perfectly elastic demand implies
that individual producers can sell all they want at the going market price but cannot charge a
Syed Arshad Hussain
higher price.
Jr. Lecturer
Chapter 4
Figure 4-2
Calculating Elasticities
Calculating Percentage Changes
% changeinquantitydemanded
changeinquantitydemanded
x100%
Q
1
Q Q
x100%
Q
2
Calculating Elasticities
Calculating Percentage Changes
changeinprice
%changeinprice
x100%
P
1
P P
x100%
P
2
Calculating Elasticities
Elasticity Is a Ratio of Percentages
priceelasticityofdemand
%changeinquantitydemanded
%changeinprice
Basics
Estimated
Price Elasticities of
Demand for Various Goods and
Services
Inelastic-Demand:
Salt, Matches, Toothpicks, Airline travel short-run
Residential natural gas, short-run
~0.1
Gasoline short-run, Automobiles long-run, Coffee ~0.2 Tobacco products shortrun
Legal services short-run
~0.4 Residential natural gas long-run
~0.5 Fish (cod) consumed at home
~0.5 Physician services, Taxi short-run
~0.6 Gasoline long-run ~0.7
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Jr. Lecturer
Basics
Basics
1.2 - 1.5
~2.3
~2.4
~2.8
~4.0 Fresh
~4.6
Syed Arshad Hussain
Jr. Lecturer
How to calculate
Numerical calculation:
ED =
Q
(Q1+Q2)/2
P
(P1+P2)/2
Read Chapter 5