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Handout Ch5

This document provides information on elasticity including definitions, formulas, and examples. It defines price elasticity of demand as the percentage change in quantity demanded divided by the percentage change in price. Perfectly inelastic demand has a price elasticity of 0, inelastic demand has a value between 0 and -1, unit elastic is -1, and elastic is more than -1. It provides examples of goods that fall under each category and discusses how businesses aim to sell elastic or inelastic goods. It also gives two methods for calculating price elasticity using initial or midpoint values and formulas.

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12 views12 pages

Handout Ch5

This document provides information on elasticity including definitions, formulas, and examples. It defines price elasticity of demand as the percentage change in quantity demanded divided by the percentage change in price. Perfectly inelastic demand has a price elasticity of 0, inelastic demand has a value between 0 and -1, unit elastic is -1, and elastic is more than -1. It provides examples of goods that fall under each category and discusses how businesses aim to sell elastic or inelastic goods. It also gives two methods for calculating price elasticity using initial or midpoint values and formulas.

Uploaded by

aydilek.a
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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HANDOUT ABOUT ELASTICITY

Percentagechange in quantity demanded


Price elasticity of demand = Percentagechange in price
.

Notation symbol
Price elasticity of demand
Percentage change in quantity demanded
Percentage change in price
change

Question: From law of demand, we know that when the change in price is
negative (when Price decreases), change in quantity demanded is positive
(quantity demanded increases) and vice versa. What should be the sign of
the price elasticity of demand?

TYPES OF ELASTICITY
1) Perfectly inelastic demand

Ped Value :

The good’s demand curve:

Example(s):
2) Inelastic Demand:

Ped Value:

The good’s demand curve:

Example(s):

3) Unit Elastic Demand:

Ped value:

4) Elastic Demand:

Ped value:

The good’s demand curve:

Example(s):
5) Perfectly Elastic Demand:

Ped value:

The good’s demand curve:

Example(s):

Question 1 : Goods: salt, gasoline, life-saving drugs, potato chips

a) Which of the goods above have the most elastic demand?

b) Which of the goods above have the least elastic (perfectly inelastic)
demand?

Question 2: Businesses often strive to sell/market products or services that


are or seem elastic or inelastic in demand? Why?
Computing the Price Elasticity of Demand
Method 1: Midpoint formula or arc elasticity of demand
Formula: Arc elasticity of demand = [(Q2 - Q1) / (Q2+ Q1)/2] / [(P2 - P1) /
(P2 + P1)/2]

Question 3 :
a) Compute the percentage change in price when the price falls from $8
to $4. Use midpoint formula

b) Compute the percentage change in quantity demanded when the price


falls from $8
to $4. Use midpoint formula

c) What is the value of the price elasticity of demand when the price falls
from $8 to $4? Use midpoint formula
Method II: Initial Value Method
change in quantity demanded
% change in quantity demanded  x 100%
Q 1

Q -Q
 2
x 100% 1

Q 1

change in price
% change in price  x 100%
P 1

P -P
 2
x 100%
1

P 1

Price elasticity of demand = (%change in quantity


demanded)/(%change in price)
Question 4: Using the graph below,

a) Calculate the percentage change in the price when price increases from
10 to 12 using the initial value method.
b) Calculate the percentage change in the quantity demanded when price
increases from 10 to 12 using the initial value method.

c) Calculate the price elasticity of demand using the initial value method
when price increases from 10 to 12.

Question 5: Compare the price elasticity of demand for the following


goods
a) Food or whole wheat bread

b) Gasoline one month after a price change or gasoline one year after a price
change

c) A yacht or milk

d) Airfare for business travelers or airfare for leisure travelers


Question 6:
Suppose that when the price of a burger decreases from $2.00
to $1.75 and other things remain the same, the quantity
demanded of burgers increases from 200 an hour to 400 an
hour and the quantity demanded of pizza decreases from 400
an hour to 200 an hour. At the same time, the quantity
demanded of soda increases from 150 an hour to 300 an hour.

a)Calculate the cross elasticity of demand for soda with respect


to burgers.

b)Are soda and burgers substitutes or complements? Why?

c)Calculate the cross elasticity of demand for pizza with respect


to burgers.

d)Are pizza and burgers substitutes or complements? Why?

e)Describe how the demand for soda and the demand for pizza
have changed.
Question 7:
When Jody's income increases by 10 percent and other things
remain the same, Jody decreases the quantity demanded of
macaroni and cheese by 20 percent and increases the quantity
demanded of chicken by 5 percent.
a) Calculate the income elasticity of demand for macaroni and
cheese.

b) Is macaroni and cheese a normal good or an inferior good?


Why?

c) Calculate the income elasticity of demand for chicken.

d)Is chicken a normal good or an inferior good? Why?

Question 8: Fill in the second column


Price elasticity of Type of price
demand elasticity of demand
-2
0
-0.6
-1
-infinity
Question 9 Which good is more inelastic?
Ped A = -0.2, Ped B = -0.3

Question 10 Which good is more elastic?


a) Ped A = -2, Ped B = -3

Question 11:

Suppose demand is inelastic at E and elastic at B.


a) What can you say about the price elasticity of demand at A?

b) What can you say about the price elasticity of demand at F?

c) What can you say about the price elasticity of demand at C?


Question 12: Rank the following goods from the most to least elastic
demand
i) caviar, food, sea food:

most elastic ------------------,

2nd most elastic --------------,

Least elastic ------------------

ii)salt in Kuwait vs salt in a very cold country, jewelry:

most elastic :------------------------------------,

2nd most elastic: --------------------------------,

Least elastic: ------------------------------------

Question 13: Fill in the third column


Write either elastic, inelastic or unit elastic.
Price TR Type of elasticity
↑ ↑
↓ ↑
↑ Does not change
↑ ↓
↓ ↓
↓ Does not change
Chapter 5 Formulas

Price Elasticity of Demand % 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 (𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝑫𝒆𝒎𝒂𝒏𝒅𝒆𝒅)


% 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝑷𝒓𝒊𝒄𝒆
(ped)

Elasticity of A with Respect % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐴


% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐵
to B

Percent Change 𝑁𝑒𝑤 𝑣𝑎𝑙𝑢𝑒 − 𝑂𝑙𝑑 𝑣𝑎𝑙𝑢𝑒


𝑥 100
𝑂𝑙𝑑 𝑣𝑎𝑙𝑢𝑒
(with initial value method)

Percent Change in Quantity Q2 −Q1


x 100%
Q1

(with initial value method)

Percent Change in Price P2 −P1


x 100
P1

(with initial value method)

Percent Change 𝑁𝑒𝑤 𝑣𝑎𝑙𝑢𝑒 − 𝑂𝑙𝑑 𝑣𝑎𝑙𝑢𝑒


𝑥 100
(𝑛𝑒𝑤 𝑣𝑎𝑙𝑢𝑒 + 𝑂𝑙𝑑 𝑣𝑎𝑙𝑢𝑒)/ 2
(with midpoint formula)

Percent Change in Quantity Q2 −Q1


x 100%
(Q1 +Q2 )/2

(with midpoint formula)

Percent Change in Price P2 −P1


x 100
(P1 +P2 )/2

(with midpoint formula)

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