2.3 Price Elasticity of Demand
Price elasticity of demand = %ΔQd ÷ %ΔP: above 1 is elastic, below 1 inelastic, and it predicts whether a price change raises or lowers total revenue.
Price elasticity of demand (Ed) measures responsiveness: the percentage change in quantity demanded divided by the percentage change in price. Using absolute value, |Ed| > 1 is elastic, |Ed| < 1 is inelastic, and |Ed| = 1 is unit elastic; perfectly inelastic demand is a vertical line and perfectly elastic demand is horizontal. Use the midpoint method, change divided by the average of the two values, so the answer is the same in both directions.
Four determinants make demand more elastic: close substitutes, a large share of the buyer's income, being a luxury rather than a necessity, and more time to adjust. Insulin is inelastic (necessity, no substitutes); a specific brand of soda is highly elastic.
The total revenue test converts elasticity into money: when demand is elastic, price and total revenue move in opposite directions; when inelastic, they move together. Along a straight-line demand curve elasticity is not constant, it is elastic on the upper half, unit elastic at the midpoint, and inelastic on the lower half, so total revenue peaks at the midpoint.
Key terms for 2.3
Drag the curves above, or open the full Elasticity sandbox. Teaching this? Put this graph on your own class page, free.
Practice the math
Reading elasticity off the slope. A straight-line demand curve has constant slope but CHANGING elasticity, elastic near the top, unit elastic at the midpoint, inelastic near the bottom.
Learn this properly, then test yourself
Teaching this topic?
A full lesson plan for 2.3, with timings, a warm-up, guided practice and an exit ticket.
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free, no spam.
No spam. Unsubscribe anytime. Read our privacy policy.
Keep track of what you have studied
A free EconLearn account adds progress tracking, your quiz history, and achievements. Studying here is free either way, and there is nothing to pay for as a student.
Create a free accountAlready have one? Sign in