For example, in Figure 1, for each point shown on the demand curve, price drops by $10 and the number of units demanded increases by 200. The slope is the rate of change in units along the curve, or the rise/run (change in y over the change in x). It’s a common mistake to confuse the slope of either the supply or demand curve with its elasticity. If you’re starting to wonder if the concept of slope fits into this calculation, read the following example. Since 3.5 is greater than 1, this means that the percentage change in quantity supplied will be greater than a 1% price change. In this case, a 1% rise in price causes an increase in quantity supplied of 3.5%. Elasticity is a ratio of one percentage change to another percentage change-nothing more-and is read as an absolute value. \displaystyle\text=3.53Īgain, as with the elasticity of demand, the elasticity of supply is not followed by any units. This is called the midpoint method for elasticity and is represented by the following equations: To calculate elasticity, we will use the average percentage change in both quantity and price. Price elasticity of demand is the percentage change in the quantity of a good or service demanded divided by the percentage change in the price. Remember, all elasticities measure the responsiveness of one variable to changes in another variable. In this section, we will focus on the price elasticity of demand and the price elasticity of supply, but the calculations for other elasticities are analogous.
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