Chapter 11 7a Elasticity of Demand

Example 1. A medical researcher is studying two treatments for a life-threatening illness. Using
treatment A, patients are dying at the rate of 10 per week in the 11th week of treatment. Using
treatment B, the death rate is 20 patients per week in the 11th week. Which treatment is better?

We dont have enough information to answer the question. In particular, we dont how many patients
are receiving treatment A and how many are receiving treatment B. In this context, it is not the number
of people who die per week that is important. It is the number of people who die compared to the
number of people receiving treatment. This is called the relative rate of change:

()
relative rate of change = = ln () , the logarithmic derivative of f(x)
()

The percentage rate of change of a function is 100% times the relative rate of change.

In the context of our example, f(x) represents the number of patients who survive the disease. Suppose
there are 100 patients receiving treatment A at the end of 10 weeks. If 10 of them die during the 11th
week, the relative rate of change is -10/100 or -0.1 or -10%. In practice, the researcher might say that
the death rate was 10% or that the death rate was 100 patients per 1,000 patients per week.

Now suppose 300 people are receiving treatment B at the end of 10 weeks. If 20 of those patients die
during the 11th week, the relative rate of change is -20/300 or about .067 or -6.7%. In practice the
researcher might say the death rate was 6.7% or 67 patients per 1,000 patients per week.

Example 2. In a medical study, an experimental treatment is

Medical Study Results
given to patients with a life-threatening illness. The study 500
began with 400 patients and the number of patients still alive
Number of Survivors

400
after x weeks is given by 300

200
() = 4000( + 10)1 100

0
A) Find the relative rate of change and the percentage rate of 0 4 8 12 16 20 24 28 32 36 40 44 48 52

change at x = 5 weeks and interpret the results. Number of Weeks

() 4000(+10)2
()
= 4000(+10)1
= ( + 10)1 = (5 + 10)1 0.0667 = 6.67%. The number of survivors
is decreasing at the rate of 6.67 per hundred patients per week. Put another way, the death rate is
6.67%.

B) Find the relative rate of change and the percentage rate of change at x = 40 weeks and interpret the
results.

( + 10)1 = (40 + 10)1 = 0.02 = 2.0%. The number of survivors is decreasing at the rate of
2 per hundred patients per week. Put another way, the death rate is 2.0%.
Example 3. Use the price-demand equation below to determine whether demand is elastic, is inelastic,
or has unit elasticity at p = 10, p = 20, and p = 30.

= () = 12,000 102

Given a price-demand function x = f(p), the elasticity of demand is the negative of the ratio of the
relative rate of change in demand divided by the relative rate of change in price:

()
relative rate of change in demand ln () () ()

() = = = =
relative rate of change in price 1 ()
ln

Generally, the slope of the function () is negative since an increase in price results in a decrease in
demand. Consequently, elasticity of demand is a positive number.

() (20) 202
() = = =
() 12,000 102 12,000 102 Elasticity of Demand
7
20 102 2000 6
(10) = 2
= .1818 5
12000 10 10 11,000

Elasticity
4
3
At a price of $10, the relative rate of change in demand is 2
1
much smaller than the relative rate of change in price. For 0
0 5 10 15 20 25 30
example, if the price were to increase by 10% to $11.00, the
Price
demand would only decrease by about 1.818% from 11,000
to about 10,800 (the actual demand would be 10,790). As a result, the demand is not affected very
much by changes in price. We say the demand is inelastic. In general, if the elasticity of demand is less
than one, the demand is said to be inelastic.

20 202 8000
(20) = 2
= =1
12000 10 20 8,000

The relative rate of change in demand is the same as the relative rate of change in price. This is called
unit elasticity. For example, if the price were to increase by 10% to $22.00, the demand would decrease
by about 10% from 8000 to 7,200 (the actual demand would be 7,160).

20 302 18000
(30) = 2
= =6
12000 10 30 3,000

The relative rate of change in demand is higher than the relative rate of change in price. For example, if
the price were to decrease by 10% to $27.00, the demand would increase by about 60% to 4,800 (the
actual demand would be 4,710). As a result, a change in the price will significantly affect the demand.
When the demand elasticity is greater than one, the demand is said to be elastic.
Example 4. Given the price demand equation + 0.005 = 30

A) Express the demand x as a function of the price p.

30
= () = = 6000 200
0.005

B) Find the elasticity of demand, E(p).

() (200) 200
() = = =
() 6000 200 6000 200

C) What is the elasticity of demand when p = $10? If the price is increased to $11 dollars what is the
approximate change in demand?

200 10 2000
(10) = = = 0.5
6000 200 10 4000

The demand is inelastic at this price point. Increasing the price by $1 is a 10% increase. The demand
would decrease by approximately 5% (from 4,000 units to 3,800 units). The actual demand would be
(11) = 3,800 units. Since the price-demand equation is linear, the secant line and the tangent line
coincide so the estimated change in demand is, in fact, the actual change.

D) What is the elasticity of demand when p = $25? If the price is decreased to $23 dollars what is the
approximate change in demand?

200 25 5000
(25) = = =5
6000 200 25 1000

The demand is elastic at this price point. Decreasing the price $2 is an 8% change. The demand would
increase by approximately 40% (from 1,000 to 1,400 units). The actual demand would be (23) = 1400
units.

E) What is the elasticity of demand when p = $15? If the price is increased by 5% what is the
approximate change in demand?

200 15 3000
(15) = = =1
6000 200 15 3000

The demand has unit elasticity at this price point. If the price is increased by 5%, the demand would
decrease by approximately 5%. That is, if the price increased to $15.75, the demand would decrease by
about 5% (from 3,000 to 2,850 units). The actual demand would be (15.75) = 2,850 units.