Tabl. 4. The Price Elasticity of Demand for Football Tickets

We have to look at column one. As you can see, this shows price cuts of two pounds fifty. By considering the effects of price cuts of two pounds fifty we can calculate the price elasticity of demand at each price. This price is shown in column three. But how have we calculated this? Let's, as an example, take the price of ten pounds, which you can see in the table. There is a corresponding quantity of twenty thousand tickets demanded. If we consider a price cut to seven pounds fifty, there is a price change here of- 25%, from ten pounds to seven pounds fifty. Now look at the corresponding change in the quantity of tickets demanded, in the next column, column two. The change in the quantity of tickets demanded is a 100%, from 20,000 tickets to 40,000 tickets.

There is a 100% change in demand, and a 25% change in price. So we divide a 100 by – 25, which gives the answer – 4. So we say the demand elasticity at ten pounds is – 4. You calculate other elasticities in the same way, that is by dividing the percentage change in quantity by the corresponding percentage change in price.

Notice one thing here in the table. That is when we begin from the price of twelve pounds fifty the demand elasticity is minus -infinity. It's simply because the percentage change looks like this. Any positive number divided by zero yields plus infinity. When we then divide by the minus twenty per cent change in price, that's from twelve pounds fifty to ten pounds, we obtain or get, minus infinity as the demand elasticity at this price.

There's one more thing to be said at this stage. We say demand elasticity is high, when it is a large negative number. And we say demand elasticity is tow, when it is a small negative number, and when the quantity demanded is relatively insensitive to price. It follows from this that the words high and low refer to the magnitude of the elasticity ignoring the minus sign. The demand elasticity falls when it becomes a smaller negative number and quantity demanded becomes less sensitive to price.

ELASTIC AND INELASTIC DEMAND

Although elasticity typically falls as we move down the demand curve, an important dividing line occurs at the demand elasticity of – 1.

Demand iselastic if the price elasticity is more negative than -1. Demand is inelastic if the price elasticity lies between -1 and 0.

In Tabl. 4 demand is elastic at all prices of £7,50 and above and inelastic at all prices of £5-00 and below. If the demand elasticity is exactly -1, we say that demand isunit-elastic.