This lesson introduces price elasticity and explains how economists classify responsiveness to price changes. It also presents the midpoint method, which provides a consistent way to calculate percentage changes between two points.
Demand and supply curves describe how the quantity buyers demand or sellers supply relates to price. Price elasticity measures how responsive quantity is to a change in price. It is the ratio of the percentage change in quantity to the percentage change in price.
All flashcards
What is price elasticity?
It is the ratio of the percentage change in quantity demanded or supplied to the corresponding percentage change in price.
What does elastic mean?
Elasticity is greater than 1, meaning quantity changes by a greater percentage than price and is relatively responsive.
What does inelastic mean?
Elasticity is less than 1, meaning quantity changes by a smaller percentage than price and is relatively unresponsive.
Why report demand elasticity as an absolute value?
Price and quantity demanded move in opposite directions, making the calculated ratio negative. By convention, economists report its magnitude without the negative sign.
What is the midpoint method's advantage?
It uses the average of the two values as the base, so the elasticity between two points is the same whether the comparison is described as an increase or a decrease.
Quiz questions
What kind of units does price elasticity have?Answer: No physical units; it is a ratio of percentage changes.
How does elasticity differ from slope?Answer: Slope measures changes in raw units; elasticity compares percentage changes.
Why can elasticity vary along a straight-line demand curve?Answer: The percentage changes depend on price and quantity levels at the points considered.
When price and quantity supplied move in the same direction, what is the sign of supply elasticity?Answer: Positive, because the percentage changes have the same sign.
If supply elasticity is 3.53 over an interval, what does that indicate?Answer: A 1% price rise is associated with about a 3.53% quantity-supplied rise.
Based on Principles of Economics 3e by Steven A. Greenlaw, David Shapiro, Daniel MacDonald (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.