Learning and Understand Elasticity of Demand

A step by step guide to economic elasticityBy Tom GunnellsLearning and Understand Elasticity of DemandBegin1The Three Parts of ElasticityThere are three parts to understand when discussing Elasticity.Change in Quantity Demanded What was the change in the demand of a given product?Change in Price What was the change in price of a given product?What does a combination of the change of Price and a change in Demand tell us about an object?

These are all questions that we will answer!2Change in QuantityWhen a change in quantity is discussed, we are talking about the change in the quantity demanded of any good by a consumer. For this example, and all of the examples in the lesson, lets use a bottle of Gatorade sold in Mr. Tokars class.

WhatAbbreviationNumberOriginal PriceP1$1New PriceP2$2Original QuantityQ160(Quantity sold at P1)New QuantityQ245(Quantity sold at P2)5Determining ElasticityTo determine elasticity, youll need to know the skills that we learned in the first two sections. If you dont remember how to determine change in price and change in demand,In the last two lessons we learned how to determine:Change in Quantity, or DQChange in Price, or DP

We will use both of these numbers to calculate elasticity

Go Back18What would you like to learn about? Determining a Change in PriceDetermining a Change in DemandDetermining Elasticity4Determining Change in QuantityLets ignore the price when trying to figure change in quantity. Just focus on the number sold.Its easy to see that theres been a reduction of 15 Gatorades, but we need to find the percent change. To do that, well use the following formulaNew Quantity Old Quantity(Old Quantity + New Quantity) /2

This can also be shown as

| Q2-Q1 | _(Q2+Q1)/2** What do the bars | | mean around the equation? Absolute value. Well always turn the number inside those bars to a positive when were done with the math inside of them.

Q160Q2456Determining Change in QuantityLets put our numbers into the formula|Q2-Q1| _|(Q2+Q1)/2|

|45-60|(45+60)/2

15 (not -15)52.57Determining Change in Quantity15 (not -15)52.5

15/52.5 = .2857.=.29

This tells us that there was a .29 change in quantity demandedThis can also be expressed as a 29% change, and may be represented by DQ , the Change in Quantity.Ready to try it on your own?8Quiz Determine Change in QuantityQuantityDemandedQ1 (Old)45Q2 (New)55Remember the formula|Q2-Q1)(Q2+Q1)/2-20 %-10 %15%20 %Back to Start9Determining Change in PriceLets ignore the quantity when trying to figure change price.

Its easy to see that theres been a raise in price, but we need to find the percent change. To do that, well use the following formulaNew Price Old Price(Old Price + New Price) /2

This can also be shown as

| P2-P1 | _(P2+P1)/2** What do the bars | | mean around the equation? Absolute value. Well always turn the number inside those bars to a positive when were done with the math inside of them.

P1$1P2$213Determining Change in PriceLets put our numbers into the formula|P2-P1| _(P2+P1)/2|

|2-1|(2+1)/2

1__1.5

=.6666 or .6714Determining Change in PriceSo, what does .67 mean?There was a 67% change in price

Are you ready to try it on your own?Price Quiz15Determining ElasticityTo determine elasticity, we divide DQ/DPSince we already know how to figure out DQ/DP, lets use the following numbersDQ= 20%DP= 67%

By dividing DQ/DP, we get our PED (price elasticity of demand)So, 20%/67% =.30

But what does this all mean?19What does PED tell usThe Price Elasticity of Demand (DQ/DP) tells us how consumers will respond to a price change of a good.Inelastic The change in demand will be less than the change in price. PED1Unit Elastic The change in demand and the change in price will be the exact same. PED=1In our previous example, the DQ/DP(PED) was .30This means that our good was INELASTIC!20InelasticityInelastic The change in demand will be less than the change in price. Example Insulin - People who need insulin to help their body regulate sugar need it. It is not a choice. This is important medicine to them. The amount they demand will not change with price.Inelasticity is when PED122Unit ElasticityUnit Elasticity The percent change in quantity will be equal to the percent change in price. This is a good where the demand changes at the same rate of the price. It doesnt have many substitutes, but its also not a necessity. Some examples of Unit Elastic goods are cars, and airplane tickets.Elasticity is when PED = 1Take the Quiz23QuizA good has a PED of 8.31. Is this Elastic, Inelastic, or Unit Elastic?

ElasticInelasticUnit Elastic24Incorrect Lets ReviewInelastic: PED1Unit Elastic: PED=1Retake Quiz25