AP Economics

Mr. Bernstein

Module 47:Interpreting Price Elasticity of Demand

October 2017

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AP EconomicsMr. Bernstein

What Does the Value of Elasticity Tell Us?• Example: Ed = %ΔQd/%ΔP = 10; P rises 1%• Algebra: %rQd/1% = 10, so %rQd = 10% fall in Qd

• For a business, this is a dramatic fall in sales due to a small price increase

• Elasticity describes the steepness of the demand curve• Elasticity of zero = “perfectly inelastic” – changes in

prices have no impact on quantity demanded (vertical)• “Perfectly elastic” – changes in prices have infinitely

large impact on quantity demanded (horizontal curve)

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AP EconomicsMr. Bernstein

Examples of Perfectly Inelastic and Elastic Curves• xxxx

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AP EconomicsMr. Bernstein

What Does the Value of Elasticity Tell Us?• In general terms:• Inelastic means a steep or steeper curve• Elastic means a flat or flatter curve

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AP EconomicsMr. Bernstein

Elasticity and Total Revenue• TR = P x Q• Price effect: Raise P, R tends to rise• Quantity effect: Raise P, Qd falls, so R tends to fall

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AP EconomicsMr. Bernstein

Elasticity along the Demand Curve• TR begins to fall as prices rise and Elasticity grows

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AP EconomicsMr. Bernstein

Determinants of Elasticity• # of Substitutes

• More substitutes, more elasticity• Luxury or Necessity

• More necessary, less elasticity • Example: Insulin vs. Bicycles

• Share of Income Spent• Larger percent of budget, more elasticity• AKA Expensive vs. Inexpensive

• Time• More time involved, more elasticity

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AP EconomicsMr. Bernstein

Determinants of Elasticity, cont.• Total Revenue (TR) Test• If TR rises as P rises, demand is inelastic• If TR falls as P falls, demand is inelastic• If TR falls as P rises, demand is elastic• If TR rises as P falls, demand is elastic

• Elasticity Coefficient Test• If Elasticity >1, it is elastic• If Elasticity <1, it is inelastic