Page 79 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes we did not multiply by (–1), the two elasticities would be –10 and –0.5. Since –0.5 is greater
than –10 we would be likely to say that Y has a greater elasticity than X (when in fact it is
the other way round). Hence without multiplying by (–1) we would not be able to substitute
"more elastic" for "more responsive".
A review of the basic formula of elasticity will show that it follows from the definition of price
elasticity.

% change in quantity demanded
e
p
% change in price
where,
New Quantity – Old Quantity
% change in Quantity demanded = 100
Old Quantity
New Price – Old Price
and % change in price = 100
Old Price
Let P = Old price
Q = Old quantity
Q = New quantity – Old quantity
P = New price – Old price

Q
100
Q Q P
e = .
p P P Q
100
P

Task Given the following data, calculate the price elasticity of demand when
(a) price increases from 5.00 per unit to 8.00 per unit and (b) the price falls from 8.00
per unit to 5.00 per unit.
P (per unit) 6 5 4 3 2 1
x
Qx 200 350 600 850 900 1200

The price elasticity of a straight line demand curve varies from infinity at the price axis to zero
at the quantity axis.
Consider a straight line demand curve cutting both the axes as shown in Figure 5.5. Elasticity of
demand, e , is defined as the numerical measure of the degree to which quantity demanded
p
responds to a change in price ceteris paribus.

Q P
e = .
p P Q

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