5 Steps to a 5 AP Microeconomics, 2014-2015 Edition

• If Ed=1, demand is said to be “unit elastic” for good X. The initial change in the price
  is exactly equal to, in percentage terms, the responsiveness of the consumer.

When describing or calculating elasticity measures, you mustuse percentage changes.

Elasticity on the Demand Curve

Take a very simple demand curve for cheeseburgers: P =6 – Qd, and plot this demand curve

in Figure 7.1.

76 á Step 4. Review the Knowledge You Need to Score High

Demand

0

1

2

3

4

5

6

7

01 23 4 56

Qd

$ Price

P = 6-Qd

G Ed > 1

Ed = 1

F Ed < 1

E

D

C

B A

Figure 7.1

Table 7.1 summarizes changes in price, quantity demanded, and price elasticity at each

point on the demand curve.*

As you can see in Figure 7.1, the price elasticity of demand is not constant at points

A through G on the demand curve. Specifically, as the price rises, Edrises, telling us that

consumers are more price sensitive at higher prices than they are at lower prices. This makes

good intuitive sense. When the price is relatively low (e.g., point B), a 10 percent increase in

price might be almost negligible to consumers. But if the original price is quite high (point F),

then a 10 percent increase in the price is pretty drastic. In fact, if we divide the demand curve

in half, you can see that above the midpoint (point D), demand is price elastic and below

the midpoint, demand is price inelastic. At the midpoint, demand is unit elastic.

Table 7.1

PRICE PER QUANTITY DEMANDED

POINT CHEESEBURGER OF CHEESEBURGERS PRICE ELASTICITY (Ed)

A0 6 = 0

B1 5 = .2

C2 4 =. 5

D3 3 = 1

E4 2 = 2

F5 1 = 5

G6 0 =•

*Note: To calculate the elasticity at each point on the demand curve in Figure 7.1, I used an equivalent way of calculating

percentage change. Your AP test does not include these calculations, but you do need to know how elasticity changes along

a demand curve.

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