Price Elasticity of Demand and Price Elasticity of Supply Quiz

PDF page 118: 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.

PDF page 118: 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.

PDF page 119: We can usefully divide elasticities 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. Unitary elasticities indicate proportional responsiveness of either demand or supply, as Table 5.1 summarizes.

PDF page 119: We can usefully divide elasticities 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. Unitary elasticities indicate proportional responsiveness of either demand or supply, as Table 5.1 summarizes.

PDF page 119: % change in quantity % change in quantity < % change in price Inelastic < 1 % change in price

PDF page 119: We can usefully divide elasticities 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. Unitary elasticities indicate proportional responsiveness of either demand or supply, as Table 5.1 summarizes.

PDF page 119: % change in quantity % change in quantity = % change in price Unitary = 1 % change in price

PDF page 119: % change in quantity % change in quantity = % change in price Unitary = 1 % change in price

PDF page 119: To calculate elasticity along a demand or supply curve 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: Q – Q 2 1 % change in quantity = × 100

PDF page 119: ⎝P + P ⎠/2 2 1 The advantage of the 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 (average quantity and average price) for both cases.

PDF page 120: First, apply the formula to calculate the elasticity as price decreases from $70 at point B to $60 at point A: 3,000 – 2,800 % change in quantity = × 100 (3,000 + 2,800)/2 200 = × 100 2,900 = 6.9 60 – 70 % change in price = × 100 (60 + 70)/2 –10 = × 100 65 = –15.4 6.9% Price Elasticity of Demand = –15.4% = 0.45 6.9% Therefore, the elasticity of demand between these two points is which is 0.45, an amount smaller than one, –15.4% showing that the demand is inelastic in this interval. Price elasticities of demand are always negative since price and quantity demanded always move in opposite directions (on the demand curve). By convention, we always talk about elasticities as positive numbers. Mathematically, we take the absolute value of the result. We will ignore this detail from now on, while remembering to interpret elasticities as positive numbers. This means that, along the demand curve between point B and A, if the price changes by 1%, the quantity demanded will change by 0.45%. A change in the price will result in a smaller percentage change in the quantity demanded. For example, a 10% increase in the price will result in only a 4.5% decrease in quantity demanded. A 10% decrease in the price will result in only a 4.5% increase in the quantity demanded. Price elasticities of demand are negative numbers indicating that the demand curve is downward sloping, but we read them as absolute values. The following Work It Out feature will walk you through calculating the price elasticity of demand.

PDF page 120: First, apply the formula to calculate the elasticity as price decreases from $70 at point B to $60 at point A: 3,000 – 2,800 % change in quantity = × 100 (3,000 + 2,800)/2 200 = × 100 2,900 = 6.9 60 – 70 % change in price = × 100 (60 + 70)/2 –10 = × 100 65 = –15.4 6.9% Price Elasticity of Demand = –15.4% = 0.45 6.9% Therefore, the elasticity of demand between these two points is which is 0.45, an amount smaller than one, –15.4% showing that the demand is inelastic in this interval. Price elasticities of demand are always negative since price and quantity demanded always move in opposite directions (on the demand curve). By convention, we always talk about elasticities as positive numbers. Mathematically, we take the absolute value of the result. We will ignore this detail from now on, while remembering to interpret elasticities as positive numbers. This means that, along the demand curve between point B and A, if the price changes by 1%, the quantity demanded will change by 0.45%. A change in the price will result in a smaller percentage change in the quantity demanded. For example, a 10% increase in the price will result in only a 4.5% decrease in quantity demanded. A 10% decrease in the price will result in only a 4.5% increase in the quantity demanded. Price elasticities of demand are negative numbers indicating that the demand curve is downward sloping, but we read them as absolute values. The following Work It Out feature will walk you through calculating the price elasticity of demand.

PDF page 121: ⎝1,600 + 1,800)/2 –200 = × 100 1,700 = –11.76 130 – 120 % change in price = × 100 (130 + 120)/2 10 = × 100 125 = 8.0 Step 4. Then, we can use those values to determine the price elasticity of demand: % change in quantity Price Elasticity of Demand = % change in price –11.76 = 8 = 1.47 Therefore, the elasticity of demand from G to is H 1.47. The magnitude of the elasticity has increased (in absolute value) as we moved up along the demand curve from points A to B. Recall that the elasticity between these two points was 0.45. Demand was inelastic between points A and B and elastic between points G and H. This shows us that price elasticity of demand changes at different points along a straight-line demand curve.

PDF page 122: Using the Midpoint Method, 13,000 – 10,000 % change in quantity = × 100 (13,000 + 10,000)/2 3,000 = × 100 11,500 = 26.1 $700 – $650 % change in price = × 100