Lecture 9Outline of Last Lecture Chapter 5- How Price Floor Works- Inefficiencies caused by price floorsHow quantity controls workOutline of Current Lecture Chapter 6- Definition of elasticity- Price elasticity of demand; income elasticity of demand- Factoring influencing elasticity of demand- Using the Midpoint method to calculate elasticityCurrent LectureDemand Elasticity The price elasticity of demand is the ratio of the percent change in the quantity demanded to the percent change in the price as we move along the demand curve (dropping the minus sign). How to calculate price elasticity of Demand:% Change in quantity demanded= change in quantity demanded/initial quantity demanded X 100% Change in price = Change in price/initial price X 100Price Elasticity of demand = % change in quantity demanded/% change in priceUsing the Midpoint Method: - is a technique for calculating the percent change.-With this approach, we calculate changes in a variable compared with the average or midpoint of the starting and final values% change in X = (Change in X/Average value of X)*100Average value of X = Starting value of X + Final value of X/2Price elasticity of demand = Q2 – Q1/(Q1+Q2)/2Microeconomics 2106P2 – P1/(P1+P2)/2Two Extreme Cases of Price Elasticity of Demand-Demand is perfectly inelastic when the quantity demanded does not respond at all to changes in the price. When demand is perfectly inelastic, the demand curve is a vertical line-Demand is perfectly elastic when any price increase will cause the quantity demanded to drop to zero. When demand is perfectly elastic, the demand curve is a horizontal line.-Demand is elastic if the price elasticity of demand is greater than 1-Demand is inelastic if the price elasticity of demand is less than 1-Demand is unit-elastic is the price elasticity of demand is exactly