4-1 What is the formula for measuring price elasticity of demand? What does it mean (in terms of relative price and quantity change) if the price elasticity coefficient is less than 1? Equal to 1? Greater than 1? Price elasticity of demand is found by dividing the percentage change in quantity demanded by the percentage change in price. Over a range of prices, we use the midpoint formula: Ed = [(change in Q)/(sum of Q’s/2)] divided by [(change in P)/(sum of P’s/2)] If the price elasticity coefficient is less than 1, this means that the percentage change in quantity is relatively smaller than the change in price – consumers are relatively unresponsive to price changes. A coefficient of 1 means that the percentage changes are equal – a 10 percent price decrease will cause a 10 percent increase in quantity demanded. A coefficient greater than one means that consumers are relatively responsive to price changes – the quantity response is greater than the price change (in percentage terms).
4-2 Graph the accompanying demand data, and then use the price elasticity formula (midpoints approach) for Ed to determine price elasticity of demand for each of the four possible $1 price changes. What can you conclude about the relationship between the slope of a curve and its elasticity?
