If a quantity x is changed by an amount ∆x, the
relative change in x is the ratio [(∆x)/x]. The
percentage change in x is 100 [(∆x)/x]. Note that there
are no units for the ratio of two quantities with the same
units.
Suppose the quantity q and the price p are related, e.g., by a
relation of the form q = D(p),
To understand the price elasticity of demand , take the
ratio
relativechangeinq
relativechangeinp
= ([(∆q)/q])/([(∆p)/p])
= [p/q] [(∆q)/(∆p)]
→ [p/q] [dq/dp]
as ∆p → 0. Define
E(p) = priceelasticityofdemand
≡
p
q
dq
dp
.
Note that E(p) should be negative, and in general will depend on
the value of the price p.
A practical interpretation of elasticity is that for every 1
percent increase in the price p, the demand q
decreases by approximately |E(p)| percent.
What is the significance of elasticity? The revenue R = p ·q, and
dR
dp
= 1 ·q + p ·
dq
dp
= q
⎛ ⎝
1 +
p
q
dq
dp
⎞ ⎠
= q ( 1 + E(p)).
For q > 0, the sign of [dR/dp] is the same as the sign of 1 + E(p).
There are three cases (Hoffmann, p. 246):
1.
Elastic Demand: |E(p)| > 1, 1 + E(p) < 0, [dR/dp] < 0, R is decreasing with respect to p.
Demand is relatively sensitive to changes in price.
2.
Inelastic Demand: |E(p)| < 1, 1 + E(p) > 0, [dR/dp] > 0, R is increasing with respect to p.
Demand is relatively insensitive to changes in price.
3.
Demand is of Unit Elasticity: |E(p)| = 1, 1 + E(p) = 0, [dR/dp] = 0, R has a critical number at
p which is a likely relative maximum. The percentage changes in price and demand are approximately
equal.
Exercises Section 3.4
23.
D(p) = − 1.3 p + 10, p = 4.
dq
dp
= − 1.3,
E(p)
= − 1.3 p/q,
E(p)|p = 4
= − 1.08.
dR
dp
= − 2.6 p + 10
dR
dp
⎢ ⎢
p=4
= − .4
|E(4)| = −0.59 < 1, Inelastic Demand, R is
decreasing with respect to p.
25.
D(p) = 200 − p2, p = 10.
dq
dp
= − 2p,
E(p)
= − 2 p2/q,
E(p)|p = 10
= − 2.
dR
dp
= 200 − 3p2
dR
dp
⎢ ⎢
p=10
= −100
|E(4)| = 2 > 1, Elastic Demand, R is
decreasing with respect to p.
40.
When an electronics store prices a certain brand of stereos at p hundred dollars per set, it is found that
q sets will be sold each month, where q2 + 2 p2 = 41.
a.
Find the elasticity of demand for the stereos.
Using implicit differentiation, 2 q [dq/dp]+ 4 p = 0, so
[dq/dp]
= [(− 2 p)/ q], and E(p) = [(− 2 p2)/(q2)].
b.
For a unit price of p = 4 ($400), is the
demand elastic, inelastic, or of unit elasticity?
E(4) = [(−2·42)/(32)], Elastic Demand, R is decreasing with respect to p.
File translated from
TEX
by
TTH,
version 4.05. On 23 Aug 2014, 01:54.