SBU Econ · Micro Principles
Elasticity Practice
Work with elasticity as a ratio of percent changes, then connect the sign and size to plain-English economic meaning.
Price elasticity of demand
εd = %ΔQd / %ΔP
Demand elasticity is negative because price and quantity demanded move in opposite directions. An own-price change causes movement along the demand curve, not a shift of demand.
Price Elasticity of Demand
Change any two values and solve for the third. For demand, the sign matters for direction, and the absolute value matters for elastic, unit elastic, or inelastic classification.
Result
Predicted quantity demanded changes by -15%.
Total revenue direction
Total revenue tends to fall because quantity demanded changes by a larger percentage than price.
Two of Three
In price elasticity problems, any two of percent price change, percent quantity change, and elasticity determine the third.
Keep signs when solving. Use the absolute value only when classifying elastic, unit elastic, or inelastic.
Practice
A 10% price increase causes quantity demanded to fall by 20%. What is εd?