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Exercises Elasticity

The document discusses price elasticity, which measures the responsiveness of quantity demanded or supplied to a change in price. It defines elastic, inelastic, and unitary elasticity, and explains how to calculate elasticity using the midpoint method. The document also includes sample tables of data and self-check questions about calculating elasticity from the data.

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Richard Tagoe
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18 views2 pages

Exercises Elasticity

The document discusses price elasticity, which measures the responsiveness of quantity demanded or supplied to a change in price. It defines elastic, inelastic, and unitary elasticity, and explains how to calculate elasticity using the midpoint method. The document also includes sample tables of data and self-check questions about calculating elasticity from the data.

Uploaded by

Richard Tagoe
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Exercises: Elasticity

Both the demand and supply curve show the relationship between price and the number of units
demanded or supplied. Price elasticity is the ratio between the percentage change in the quantity
demanded (Qd) or supplied (Qs) and the corresponding percent change in price. The price
elasticity of demand is the percentage change in the quantity demanded of a good or service
divided by the percentage change in the price. The price elasticity of supply is the percentage
change in quantity supplied divided by the percentage change in price.

Elasticities can be usefully divided into three broad categories: elastic, inelastic, and unitary. An
elastic demand or elastic supply is one in which the elasticity is greater than one, indicating a
high responsiveness to changes in price. Elasticities that are less than one indicate low
responsiveness to price changes and correspond to inelastic demand or inelastic supply.

To calculate elasticity, instead of using simple percentage changes in quantity and price,
economists use the average percent change in both quantity and price. This is called the Midpoint
Method for Elasticity, and is represented in the following equations:

The advantage of the is Midpoint Method is that one obtains the same elasticity between two
price points whether there is a price increase or decrease. This is because the formula uses the
same base for both cases.

Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a
change in its price. It is computed as the percentage change in quantity demanded (or supplied)
divided by the percentage change in price. Elasticity can be described as elastic (or very
responsive), unit elastic, or inelastic (not very responsive). Elastic demand or supply curves
indicate that quantity demanded or supplied respond to price changes in a greater than
proportional manner. An inelastic demand or supply curve is one where a given percentage
change in price will cause a smaller percentage change in quantity demanded or supplied. A
unitary elasticity means that a given percentage change in price leads to an equal percentage
change in quantity demanded or supplied.

Self-Check Questions

1. From the data shown in Table 2 about demand for smart phones, calculate the price elasticity
of demand from: point B to point C, point D to point E, and point G to point H. Classify the
elasticity at each point as elastic, inelastic, or unit elastic.
Table 2:

Price Quantity
A 60 3 000
B 70 2 800
C 80 2 600
D 90 2 400
E 100 2 200
F 110 2 000
G 120 1 800
H 130 1 600

From the data shown in Table 3 about supply of alarm clocks, calculate the price elasticity of
supply from: point J to point K, point L to point M, and point N to point P. Classify the elasticity
at each point as elastic, inelastic, or unit elastic.

Table 3:

Point Price ($) Quantity supplied


J 8 50
K 9 70
L 10 80
M 11 88
N 1132 95
P 100

Review Questions

1. What is the formula for calculating elasticity?


2. What is the price elasticity of demand? Can you explain it in your own words?
3. What is the price elasticity of supply? Can you explain it in your own words?

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