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 yourself — the fastest way to make 2.3 stick.
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.
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