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AP Economics

AP Economics. Mr. Bernstein Module 46 ( pp 460-464 only): Defining and Measuring Elasticity October 17, 2014. AP Economics Mr. Bernstein. Definition of Elasticity Applies to the relationship between any two variables, such as price and quantity demanded

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AP Economics

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  1. AP Economics Mr. Bernstein Module 46 (pp 460-464 only): Defining and Measuring Elasticity October 17, 2014

  2. AP EconomicsMr. Bernstein Definition of Elasticity • Applies to the relationship between any two variables, such as price and quantity demanded • The Law of Demand states there is an inverse relationship between price and quantity demanded • Elasticity measure the responsiveness – ie we know the quantity demanded decreases when prices increase, but by how much? • Examples: Gas doubles in price - what will be the effect on driving? The price of pens double - will this change your writing habits?

  3. AP EconomicsMr. Bernstein Definition of Elasticity, cont. • % change in the dependent variable / % change in the independent variable • Aka %rdep / %rind • Price Elasticity of Demand is % change in Quantity Demanded / % change in Price • Aka Ed = %rQd/ %rP

  4. AP EconomicsMr. Bernstein The Midpoint Formula • Problem: Using Ed = %rQd / %rP formula, the Elasticity of Demand calculations will change if the starting and ending points are reversed!! • Example: If price rises from 100 to 110, this is 10% increase. If price drops from 110 to 100, this is 9.1% decrease • Solution: Use the Midpoint Formula

  5. AP EconomicsMr. Bernstein The Midpoint Formula • %rP = 100*(New Price – Old Price) / Average Price • %rQd= 100*(New Quantity Demanded – Old Quantity Demanded) / Average Quantity Demanded • Example: Rutgers raises tuition from $20,000 to $24,000 per year. The number of new freshman declines from 10,000 to 8,000. How elastic is demand? • %rP = 100*(20,000-24,000)/22,000 = 18 and • %rQd= 100*(10,000-8,000)/9,000 = 22 • Ed = 18 / 22 or .81, an inelastic response between the two points on the demand curve • Without Midpoint Formula, Ed = 20/20, or 1.0 (unit elastic)

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