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Elasticity
Elasticity of Demand
Elasticity
In economics, it means responsiveness.
In general, it is the ratio of the percent change
in one variable to the percent change in
another variable.
It is a tool used by economists for measuring
the reaction of a function to changes in
parameters in relative way.
Elasticity of Demand
Demand Elasticity
Is a measure of the degree of the
responsiveness of quantity demanded of a
product to a given change in one of the
independent variables which affect demand
for that product.
Qd / Q
P / P
Where:
Q = Q2
Q
1
d
Q
Q = 2+
Q1
2
P = P2 P21 +
P = P
P1
2
Questions:
1. The price of a popular soft drink decreases from P10 to
P9. This leads to an increase in the demand, from 3
liters to 8 liters. Solve for the price elasticity of demand.
2. Suppose the price for the paper clips increases from P2
to P3. This results in a decrease in demand from 22
pieces to 20 pcs. Solve for the price elasticity of
demand.
Elastic
Demand
(Ed > 1)
Inelastic
Demand
(Ed < 1)
P2 = 3
P1 =
10
P2 =
P1 =
Q1 =
Q2 =
Q2 =
Q1 =
20
22
Perfectly Elastic
Demand
Q Q
2