Econ 101 -> Elasticity: How responsive is the quantity demanded to a change in price?

BC is harmonizing PST & GST into a 12% harmonized sales tax. This means that our tax base is larger (we're going to be taxed fully on more items). Yeeech.
Some politicians have been saying that businesses will pass on their savings to consumers. Prof G. thinks this is rubbish! Why? We will discover and be able to explain it by the end of the week (which is very exciting

1: Price elasticity of Demand
2: Price elasticity of Supply
3: Income elasticity of Demand
4: Cross elasticity of demand
5: Note on Point Elasticity

Price (bottom) elasticity of demand (top): PeD (e will look like n, which is a greek letter eta)

BASICALLY, when we are talking about demand curves, there are two significant factors which we need to take into account when measuring elasticity: LOCATION of the curve, and INCLINATION (slope) of the curve.

Visually, elasticity is a measure of both the location and inclination of a curve. In reality, elasticity is a measure of how responsive the quantity demanded is to a change in price. High elasticity means that demand is highly responsive to price changes. Low elasticity means that demand is not very responsive to price changes.

The formula!
Elasticity = (Average Price/Average Quantity Demanded) X (1/Slope)
Elasticity = Average Change in quantity demanded / relative change in price

It's sort of like an inverted slope, in a sense, but with other factors.


WE WANT TO KNOW THE RELATIVE CHANGE, because the impact of a change depends on its context. 1$ raise is huge if you only make 50 cents per hours. It is negligible if you make 600 dollars per hour. This is why both slop and location are a factor. We use average price and average quantity demanded because if we used only the starting or ending points of an arc to measure elasticity, it would be inaccurate.



Price -bottom- elasticity of Demand -top-

/\Q / Avg Q
/\ P / Avg P




Average Quantity demanded is higher for the curve on the right, so the elasticity will be smaller.


Flatter lines are more elastic, because their inverted slope is greater.

More next time. We are still thrashing this all out.

IMPORTANT: there are lots of formulas out there. whenever possible, just use average prices, average quantity demaned, and slope. It simplifies things!