Elasticity

C H AP T E R

P r i c e

EI G H T

e l a s t i c i t y

o f

d e m a n d

Measuring Elasticity of Demand

Demand curves can have many different shapes and so it is important to derive a

way to convey their shape with some precision. For example how would you describe

the difference between the two following curves?

P

P

D

D

Q

Q

Without a precise means of measuring differences you would be forced to

conclude that one curve is steeper than the other. Still, people can interpret the word

“steeper” differently. To avoid confusion about the shapes of these curves a more

scientific approach should be taken.

To explain the shapes of demand curves with precision refer to their price

elasticity of demand or in simple terms their elasticity. Elasticity is the responsiveness

of a change in one variable to a change in another. Consumers generally respond to

prices changes thus economists call this measurement the price elasticity of demand.

To calculate the price elasticity of demand this simple formula is used:

Elasticity = the percentage change in quantity demanded divided by the

percentage change in price. Putting this definition into mathematical symbols yields:

E = % ∆ in Qd / % ∆ in P

Where the % ∆ in Qd (the numerator) is calculated by solving Q2-Q1 / Q1, and similarly

the % ∆ in P (the denominator) is calculated by P2-P1 / P1. The price elasticity formula

then appears as:

E=

Q2-Q1 / Q1

P2-P1 / P1

The “P’s & Q’s” in this formula represent the coordinates for two different points along a

demand curve. After making the appropriate substitutions into this formula you will note

that an elasticity coefficient results. Coefficients will be greater than one, less than one,

or equal to one. Demand and supply curves are then named based upon their elasticity

coefficients. When the coefficient is greater than one the curve is known as elastic. If

the coefficient is less than one the curve is said to be inelastic. And of...