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1 Price Elasticity of Demand
One way economists measure the responsiveness of consumers to a change in
the price of a product is with what is called price elasticity of demand.
For example, changing the price on vegetables usually strongly affects the
demand while changing the price of milk or water doesn’t affect that demand
that much.
p(x)/x
η=
dp/dx
where η the lowercase Greek letter eta. For a given price, the demand is said
to be elastic if |η| > 1 and the demand is said to be inelastic if |η| < 1.
The demand is unit elasticity if |η| = 1.
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Examples:
√
1. Let the demand function for a product be modeled by p(x) = 21− 32 x.
Find the price elasticity of demand when x = 36 and x = 400.
dp
solution: Here dx
= − 4√3 x . So for x = 36:
3√
p(36) = 21 − 36
2
= 12
3
p0 (36) = − √
4 36
1
= −
8
Thus
12/36 8
η= =−
−1/8 3
Here |η| > 1 so the demand is elastic.
For x = 400:
3√
p(400) = 21 − 400
2
= −9
3
p0 (400) = − √
4 400
3
= −
80
Thus
−9/400 3
η= =
−3/80 5
Here |η| < 1 so the demand is inelastic.
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2. Suppose the demand function for ice cream bars is given by p(x) =
8 − 2x. For what values of x do ice cream bars have unit elasticity?
solution: Mmm, ice cream bars. At any rate, the formula for η is
p(x)/x
η =
dp/dx
(8 − 2x)/x
=
−2
4
= − +1
x