Home Assignment on Elasticity of Demand

Prepared by:

Sk Ahasanur Rahman
ID: 1935043681
PBH 653: Health Economics & Financing
EMPH Summer 2020

Prepared for:

Professor Nahid Akhter Jahan

Institute of Health Economics University of Dhaka
&
Part-time Faculty Department of Public Health North South University

Due date: 16th July 2020

Assume that two demand curves in two different markets for physician visits cross at a price
of $30 and quantity demanded equal to 10,000 visits. The consumers in market 2 are more
responsive to price reductions than are those in Market 1. Now let the price fall by $5.
Consumers in Market 1 demand 10,300 visits, whereas those in Market 2 demand 10,500 visits.

 Calculate the arc elasticity of demand in Market 1 and Market 2.

 Explain the relationship between price elasticity of demand and total expenditure using the above
example.

Situation: Market 1

We have:

Initial Price (PI) = 30, New Price (PN) = 25, As the price fall by $5
Initial Quantity (QI) = 10000, New Quantity (QN) = 10300.

AED = {(QN − QI) / (QN + QI)} / {(PN - PI) / (PN + PI)}

AED = {(10300 − 10000) / (10300 + 10000)} / {(25 - 30) / (25 + 30)}
AED = 0.014778 / -0.09090
AED = -0.1625

Price Elasticity of Demand: -0.1625

Type of Elasticity: Inelastic Demand
Since |PED| < 1 ⇒ demand is inelastic.
1

Situation: Market 2

We have:

Initial Price (PI) = 30, New Price (PN) = 25, As the price fall by $5
Initial Quantity (QI) = 10000, New Quantity (QN) = 10500.

AED = {(QN − QI) / (QN + QI)} / {(PN - PI) / (PN + PI)}

AED = {(10500 − 10000) / (10500 + 10000)} / {(25 - 30) / (25 + 30)}
AED = 0.02439/ -0.09090
AED = -0.26831

Price Elasticity of Demand: -0.26831

Type of Elasticity: Inelastic Demand
Since |PED| < 1 ⇒ demand is inelastic.

In Market - 1, price was fixed as P1 X Q1 = expenditure.

30X10000 =30,00,000
As the price fall by $5, and the Quantity of demand
raised up to 10,300. Therefore the new equation is
P2 = 25 and Q2 = 10300 So P2 X Q2 = 2,57,500
In the inelasticity of demand, when price fall and
the quantity of demand increases a bit, total
expenditure will decrease. Here the initial total
expenditure was 30,00,000 and after the price fall it
went down to 2,57,000. Resulted in lower
In Market - 2, price was fixed as P1 X Q1 =
30X10000 =30,00,000
As the price fall by $5, and Quantity demand raised
up to 10,500. Therefore the new equation is
P2 = 25 and Q2 = 10500 So P2 X Q2 = 2,62,500
In the inelasticity of demand, when price fall and
the quantity of demand increases a bit, total
expenditure will decrease. Here the initial total
expenditure was 30,00,000 and after the price fall it
went down to 2,62,500. Resulted in lower
expenditure.