Page 505 - Krugmans Economics for AP Text Book_Neat

To calculate the percent change in quantity going from situation A to situation B, we
compare the change in the quantity demanded—a fall of 200 units—with the average of
the quantity demanded in the two situations. So we calculate

−200 −200
% change in quantity demanded = × 100 = × 100 = −20%
(1,100 + 900)/2 1,000

In the same way, we calculate the percentage change in price as Section 9 Behind the Demand Curve: Consumer Choice

$0.20 $0.20
% change in price = × 100 = × 100 = 20%
($0.90 + $1.10)/2 $1.00

So in this case we would calculate the price elasticity of demand to be

% change in quantity demanded 20%
Price elasticity of demand = = = 1
% change in price 20%

again dropping the minus sign.
The important point is that we would get the same result, a price elasticity of de-
mand of 1, whether we went up the demand curve from situation A to situation B or
down from situation B to situation A.
To arrive at a more general formula for price elasticity of demand, suppose that we
have data for two points on a demand curve. At point 1 the quantity demanded and

fyi

Estimating Elasticities
You might think it’s easy to estimate The most comprehensive effort to table 46.1
price elasticities of demand from real- estimate price elasticities of demand
world data: just compare percent was a mammoth study by the econo- Some Estimated Price Elasticities of Demand
changes in prices with percent changes mists Hendrik S. Houthakker and
Good Price elasticity of demand
in quantities demanded. Unfortunately, Lester D. Taylor. Some of their results
it’s rarely that simple because changes are summarized in Table 46.1. These Inelastic demand
in price aren’t the only thing affecting estimates show a wide range of price Eggs 0.1
changes in the quantity demanded: other elasticities. There are some goods, Beef 0.4
factors—such as changes in income, like eggs, for which demand hardly
Stationery 0.5
changes in population, and changes in responds at all to changes in the
Gasoline 0.5
the prices of other goods—shift the de- price; there are other goods, most
mand curve, thereby changing the quan- notably foreign travel, for which the Elastic demand
tity demanded at any given price. To quantity demanded is very sensitive Housing 1.2
estimate price elasticities of demand, to the price. Restaurant meals 2.3
economists must use careful statistical Notice that Table 46.1 is divided into
Airline travel 2.4
analysis to separate the influence of two parts: inelastic and elastic demand.
Foreign travel 4.1
these different factors, holding other We’ll explain in the next section the signif-
Source: Hendrick S. Houthakker and Lester D. Taylor, Consumer Demand in
things equal. icance of that division.
the United States, 1929–1970 (Cambridge: Harvard University Press, 1970)

module 46 Income Effects, Substitution Effects, and Elasticity 463