ECON1101 Lecture Notes - Lecture 6: Arc Elasticity, Midpoint Method
ECON1101 Week 3 Lecture A
● Simple Example:
○ (1) Consider a (small) price change on the quantity demanded of a good,
say, orange juice
■ Before P1 = $1 Q1 = 1000L
■ After P2 = 99 cents Q2 = 1005L
■ Change P = - 1 cent Change in quantity = 5L
○ (2) Consider a large price change on the quantity demanded of a good,
say, orange juice
■ Before P1 = $1 Q1 = 1000L
■ After P2 = 50 cents Q2 = 2000L
■ Change P = -50 cents Change in quantity = 1000L
● Price Elasticity of demand:
○ Negative of the % change in QD divided by the % change in P
○ EP = % change in Quantity demanded/ % change in price -> [(change in
quantity/quantity)] / [(change in price)/price] -> - Change in quantity/
change in price x price/quantity -> 1/-(change in price/change in quantity)
x price/quantity
○ Slope = rise/run = change in price/change in quantity = -1/slope x
price/quantity
○ THIS IS POINT ELASTICITY OF DEMAND (ED = -1/SLOPE X P/Q)
■ Use for a small price change
○ QD = - (change in quantity/ quantity initial)/(change in price/price initial)
○ PRICE OF THE ELASTICITY OF D IS NOT THE SAME AS SLOPE OF D
CURVE BUT THE TWO ARE RELATED
● Arc elasticity of demand (midpoint method)
○ (2) ED = -(change quantity demanded/average of quantity) / (change in
price)/ average of price -> -1000/(1000+2000/2) / -0.5/(1+0.5)/2
○ Use for large price changes
● Some terminology:
○ Copy out the shit that was taken on your phone
○ Perfect inelastic demand: shape of curve is vertical
■ Apply a price increase jack it up alot but the quantity demanded is
the same thus the quantity demanded = 0
○ Perfectly elastic demand: shape of curve is horizontal
■ Infinitely large change
■ The slope is always the same but the elasticity will vary
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Document Summary
(1) consider a (small) price change on the quantity demanded of a good, say, orange juice. (2) consider a large price change on the quantity demanded of a good, say, orange juice. Negative of the % change in qd divided by the % change in p. Ep = % change in quantity demanded/ % change in price -> [(change in quantity/quantity)] / [(change in price)/price] -> - change in quantity/ change in price x price/quantity -> 1/-(change in price/change in quantity) x price/quantity. Slope = rise/run = change in price/change in quantity = -1/slope x price/quantity. This is point elasticity of demand (ed = -1/slope x p/q) Qd = - (change in quantity/ quantity initial)/(change in price/price initial) Price of the elasticity of d is not the same as slope of d. (2) ed = -(change quantity demanded/average of quantity) / (change in price)/ average of price -> -1000/(1000+2000/2) / -0. 5/(1+0. 5)/2.
