Elasticity IISome real world examples…• Eggs………………..0.1 (Inelastic-small portion of income)• Healthcare………….0.2• Housing……………..0.7• Beef…………………1.6 (Elastic-many substitutes)• Restaurant Meals….2.3• Mountain Dew………4.4Your turn…Consider the market price for snow shovels:Price Quantity Demanded102010050Calculate price elasticity of demand% change in Q= 100-50/50= 1% change in P= 10-20/20= - ½ %ChangeQ/%ChangeP= -2OR 50-100/100 all over 20-10/10 = -½ / 1 = -½ = %ChangeQ/%ChangePThere are 2 different possibilities: this method does not work because there is no starting point.*****Midpoint Method*****• We use percents to avoid unit sensitivity• We use the "midpoint method" to overcome "direction" sensitivity• (∆Q / Avg Q) / (∆P / Avg P)• (Q2 - Q1) times ((P2 + P1)/2))• ((Q2+Q1)/2)) (P2-P1) = (Q2-Q1) / (Q2+Q1) * (P2+P1) / (P2-P1) (∆Q * ∑P) / (∑Q * ∆P)A numerical example:P Q ∆Q ∑P Product30 300 N/A -- --40 250 50 70 350050 200 50 90 450060 150 50 110 550070 100 50 130 6500P Q ∑Q ∆P Product30 300 -- -- --40 250 550 10 550050 200 450 10 450060 150 350 10 350070 100 250 10 2500P Q ∆Q*∑P ∑Q∆P Ratio30 300 -- -- --40 250 3500 5500 0.63650 200 4500 4500 1.0060 150 5500 3500 1.5770 100 6500 2500 2.60Interpreting Elasticity Results• If ■<1, then relatively inelastic• If ■=1, then unitary elastic• If ■>1, then relatively elasticP Q Ratio Result30 300 -- --40 250 0.636 Inelastic50 200 1.00 Unitary Elastic60 150 1.57 Elastic70 100 2.60 More ElasticElasticity and Total RevenueThinking about total revenue: Q * P = Total RevenueWhen price falls from A to B…. does total revenue increase or decrease? DecreaseWhen demand is inelastic• A decrease in price…• leads to smaller increase in Qd• So total revenue decreasesInelastic: ^ P > ^ TR (also dec in P = dec TR)When price falls from A to B….Does total revenue increase or decrease? IncreaseWhen demand is elastic• A decrease in price…• leads to a bigger increase in Qd• So total revenue ■increasesElastic: ^ P > dec TR (Also dec P = ^
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