Measuring elasticity

1. 1
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Measurement of Elasticity

2. 2
The Total Revenue Method
 The total revenue
method is the
simplest way of
telling whether
demand is elastic,
inelastic.

3. 3
The Total Revenue Method
 The total revenue
that would be
received by sellers
at various prices is
found by
multiplying price
by quantity
demanded.

4. 4
The Total Revenue Method
 When total revenue
moves in the
opposite direction
to the price change,
demand is elastic.
 Example:
Price TR
Price TR

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The Total Revenue Method
 At $1 consumers demand 100 units
and the revenue equals $100.
 At 99c consumers demand 105 units
and revenue equals $103.95.
 By price, Revenue . Demand is
therefore elastic.

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The Total Revenue Method
 Total revenue remains the
same when prices change
if demand has unit
elasticity.
 At $1 consumers demand
99 units and revenue
equals $99.
 At 99c consumers demand
100 units and revenue
equals $99

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The Total Revenue Method
 The price change
has not resulted in
any change in
revenue.
 Demand is
therefore unitary
elastic.

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The Elasticity Coefficient
 To find the
degree of
elasticity or
inelasticity it is
necessary to
calculate the
elasticity
coefficient.

9. 9
The Elasticity Coefficient
 This is the
proportional change
in quantity
demanded by the
proportional change
in the price.

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The Elasticity Coefficient
 If the elasticity coefficient is greater
than 1, then the demand is elastic.
 If the elasticity coefficient is less
than 1, then the demand is inelastic.
 If the elasticity coefficient is equal to
1, then demand has unit elasticity.

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The Elasticity Coefficient
 The elasticity coefficient can be
found using either the arc or the
point method.

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The Arc Method
The arc method should
always be used when
there is a proportionally
large price change. It
averages the elasticity
over the distance that is
under consideration on
the demand curve.

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The Arc Method
 q1 is the original quantity demanded
 q2 is the quantity demanded after the
price change
 P1 is the original price
 P2 is the new price

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The Arc Method
 The formula for finding the
coefficient of arc elasticity is:
 e = q1 - q2 p1 - p2
q1 + q2 p1 + p2
2 2

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The Point Method
 The formula for finding the
coefficient of point elasticity is:
 e =

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The Point Method
 Q is the quantity demanded
 Q is the change in the quantity
demanded
 P is the price
 P is the change in price

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The Point Method
 When 100 units are demanded at $5
and 90 units are demanded at $6, the
point coefficient is:
 e =
 e = 10/100 1/5
 e = 10/100 x 5/1 = 0.5
 Elasticity is therefore Inelastic < 1
1 1

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accounting
and business advice
Business
Systems
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