Page 54 - DECO101_MICRO_ECONOMICS_ENGLISH

Unit 4: Elasticity of Demand

Notes
Example: Given the following data, calculate the price elasticity of demand when
(a) price increases from ` 3.00 per unit to ` 4.00 per unit and (b) the price falls from ` 4.00 per unit
to ` 3.00 per unit.
P (per unit) 6 5 4 3 2 1
x
Q x 750 1250 2000 3250 4650 8000
ΔQ P dq P
e = × or ×
p ΔP Q dp Q
(a) When price increases from ` 3 to ` 4 per unit, P, the old price = ` 3 and Q, the old quantity
(from the table) = 3250 units.
New Price = ` 4
New Quantity = 2000 units.
∆P = New price – Old price = 4 – 3 = 1

∆Q = New quantity – Old quantity = 2000 – 3250 = – 1250
Substituting,
−
( 1250) 3
e = ( ) − × = 1.15
p 1 3250
(b) When price falls from ` 4 to ` 3 per unit,
P, the old price = ` 4
Q, the old quantity (from the table) = 2000

New price = ` 3
New quantity = 3250 units
∆P = New price – Old price = 2000 – 3250 = –1250
∆Q = 3250 – 2000 = 1250

Substituting,
−
( 1250) 4
e = ( ) − × = 2.5
p 1 2000

The price elasticity of a straight line demand curve varies from infinity at the price axis to zero
at the quantity axis.
P
e = α
p
A
BC
C e= AC
p
e p
increasing M [e = 1]
e > 1 p
p
e p
decreasing e = 0
p
e < 1
p
O B Q

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