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MBA 5110 Chap 5 Metzgar
Essential Question: how can you measure price sensitivity and use that information?
Example: You operate a miniature golf course. Things seem to be going well and profits are decent.
You are considering raising your price. What information could help you determine if this is the right
decision?
What is elasticity in general? What is price elasticity of demand?
Measure of responsiveness of quantity demanded or quantity supplied to a change in one of its
determinants
Measure of how much the quantity demanded of a good responds to a change in the price of that
good, computed as the percentage change in quantity demanded divided by percentage change in
price
What (4) things affect the price elasticity of demand?
Availability of Close Substitutes
Necessities v. Luxuries
Definition of Market
Time Horizon
How can you calculate the price elasticity of demand?
Price of elasticity of demand= 𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑫𝒆𝒎𝒂𝒏𝒅𝒆𝒅
𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑷𝒓𝒊𝒄𝒆
What’s the best way to measure percentage change?
The Midpoint Method: (𝑸𝟐−𝑸𝟏)/[𝑸𝟐+𝑸𝟏)/𝟐]
(𝑷𝟐−𝑷𝟏)/[𝑷𝟐+𝑷𝟏)/𝟐]
CQ1. At a price of $3, 60 units are sold. When the price is increased to $4, 40 units are sold. Calculate
the price elasticity of demand using the midpoint formula.
1.4
When you obtain a value for price elasticity of demand, what does that mean? What are the (3) main
categories?
The responsiveness of quantity demanded to change in price
Elastic—elasticity is greater than 1, which means quantity moves proportionately more than the price
Inelastic—elasticity is less than 1, which means the quantity moves proportionately less than price
