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The Price Elasticity of Demand (commonly known as just price elasticity) measures the rate of response of quantity demanded due to a price change. The formula for the Price Elasticity of Demand (PEoD) is: PEoD = (% Change in Quantity Demanded)/(% Change in Price) You may be asked the question "Given the following data, calculate the price elasticity of demand when the price changes from $9.00 to $10.00" Using the chart on the bottom of the page, I'll walk you through answering this question. (Your course may use the more complicated Arc Price Elasticity of Demand formula. If so you'll need to see the article on Arc Elasticity) First we'll need to find the data we need. We know that the original price is $9 and the new price is $10, so we have Price(OLD)=$9 and Price(NEW)=$10. From the chart we see that the quantity demanded when the price is $9 is 150 and when the price is $10 is 110. Since we're going from $9 to $10, we have QDemand(OLD)=150 and QDemand(NEW)=110, where "QDemand" is short for "Quantity Demanded". So we have: Price(OLD)=9 Price(NEW)=10 QDemand(OLD)=150 QDemand(NEW)=110 To calculate the price elasticity, we need to know what the percentage change in quantity demand is and what the percentage change in price is. It's best to calculate these one at a time.
[Price(NEW) - Price(OLD)] / Price(OLD) By filling in the values we wrote down, we get: [10 - 9] / 9 = (1/9) = 0.1111 We have both the percentage change in quantity demand and the percentage change in price, so we can calculate the price elasticity of demand.
If PEoD > 1 then Demand is Price Elastic (Demand is sensitive to price changes) If PEoD = 1 then Demand is Unit Elastic If PEoD < 1 then Demand is Price Inelastic (Demand is not sensitive to price changes)
Recall that we always ignore the negative sign when analyzing price elasticity, so PEoD is always positive. In the case of our good, we calculated the price elasticity of demand to be 2.4005, so our good is price elastic and thus demand is very sensitive to price changes.
Data
Price $7 $8 $9 $10 $11 Quantity Demanded 200 180 150 110 60 Quantity Supplied 50 90 150 210 250
By filling in the values we wrote down, we get: [180 - 150] / 150 = (30/150) = 0.2 So we note that % Change in Quantity Demanded = 0.2 (We leave this in decimal terms. In percentage terms this would be 20%) and we save this figure for later. Now we need to calculate the percentage change in price.
Often an assignment or a test will ask you the follow up question "Is the good a luxury good, a normal good, or an inferior good between the income range of $40,000 and $50,000?" To answer that use the following rule of thumb:
If IEoD > 1 then the good is a Luxury Good and Income Elastic If IEoD < 1 and IEOD > 0 then the good is a Normal Good and Income Inelastic If IEoD < 0 then the good is an Inferior Good and Negative Income Inelastic
In our case, we calculated the income elasticity of demand to be 0.8 so our good is income inelastic and a normal good and thus demand is not very sensitive to income changes.
Data
Income $20,000 $30,000 $40,000 $50,000 $60,000 Quantity Demanded 60 110 150 180 200
Price(OLD)=9 Price(NEW)=10 QDemand(OLD)=150 QDemand(NEW)=190 To calculate the cross-price elasticity, we need to calculate the percentage change in quantity demanded and the percentage change in price. We'll calculate these one at a time.
We conclude that the cross-price elasticity of demand for X when the price of Y increases from $9 to $10 is 2.4005.
If CPEoD > 0 then the two goods are substitutes If CPEoD =0 then the two goods are independent (no relationship between the two goods If CPEoD < 0 then the two goods are complements
In the case of our good, we calculated the cross-price elasticity of demand to be 2.4005, so our two goods are substitutes when the price of good Y is between $9 and $10.
Price elasticity of demand: = -4P/(110-4P) Price elasticity of demand: = -20/90 Price elasticity of demand: = -2/9 Thus our price elasticity of demand is -2/9. Since it is less than 1 in absolute terms, we say that Demand is Price Inelastic
We saw that we can calculate any elasticity by the formula: Elasticity of Z with respect to Y = (dZ / dY)*(Y/Z) In the case of cross-price elasticity of demand, we are interested in the elasticity of quantity demand with respect to the other firm's price P'. Thus we can use the following equation: Cross-price elasticity of demand = (dQ / dP')*(P'/Q) In order to use this equation, we must have quantity alone on the left-hand side, and the right-hand side be some function of the other firms price. That is the case in our demand equation of Q = 3000 - 4P + 5ln(P'). Thus we differentiate with respect to P' and get: dQ/dP' = 5/P' So we substitute dQ/dP' = 5/P' and Q = 3000 - 4P + 5ln(P') into our cross-price elasticity of demand equation: Cross-price elasticity of demand = (dQ / dP')*(P'/Q) Cross-price elasticity of demand = (5/P')*(P'/(3000 -4P + 5ln(P'))) We're interested in finding what the cross-price elasticity of demand is at P = 5 and P' = 10, so we substitute these into our cross-price elasticity of demand equation: Cross-price elasticity of demand = (5/P')*(P'/(3000 -4P + 5ln(P'))) Cross-price elasticity of demand = (5/10)*(5/(3000 - 20 + 5ln(10))) Cross-price elasticity of demand = 0.5 * (5 / 3000 - 20 + 11.51) Cross-price elasticity of demand: = 0.5 * (5 / 2991.51) Cross-price elasticity of demand: = 0.5 * 0.00167 Cross-price elasticity of demand: = 0.5 * 0.000835 Thus our cross-price elasticity of demand is 0.000835. Since it is greater than 0, we say that goods are substitutes.
Instructions
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1. 1 Take a typical demand curve and select two points on it. For example, Point A has a price of $15 and a quantity demanded of 15. Point B has a price of $10 and a quantity demanded of 18.
Calculate the percentage change in quantity. With two points on the demand curve, take the change in quantity and then divide it by the beginning quantity. Take ( Q2 - Q1 ) / Q1. In the example, Q2 = 18 and Q1 = 15. So the difference between them is 3. Dividing this by 15 gives you a 20 percent. In other words, quantity demanded increased by 20 percent.
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3 Calculate the percentage change in price. Take the difference between the two prices and divide it by the beginning price. The formula is ( P2 - P1 ) / P1. Referring back to the example, P2 = $10 and P1 = $15. So the difference between them is $5. Dividing this by 15 gives you a -33 percent. In other words, price decreased by 33 percent.
4 Divide the percentage change in quantity by the percentage change in price. This gives you the price elasticity of demand. In the example, divide the 20 percent increase in quantity by the 33 percent decrease in price.That gives you a price elasticity of demand of -60 percent or -0.60.
Answer
Price elasticity refers to the responsiveness of consumer over to a change in price of goods/services. now, lets focus to your problem.. Lets say QD = 300-15p. we can't measure the elasticity for compact disc because you didn't give other data showing that there is a changes in price. Anyway, I can help you by giving assumption to the price of this product using the same demand equation (QD=300-15p) LEt say at original price is at $10 and second price is $15 1st step, find the qty demanded using our equation Qd=300-15p Qd1= 300-15p = 300-15(10) = 300-150 Qd1= 150 Qd2= 300-15p = 300-15(15) =300-225 Qd2= 75 Now after getting the quantity demanded find the price elasticity; Price elasticity = % change in qty. demaded / % change in Price Ep= q2-q1/q1 * p1/p2-p1 Ep= 75-150/150 * 10/15-10 = (-0.5) * 2
= -1 = /-1/ =1 Price Elasticity is 1 therefore it is UNITARY ELASTIC. This means that using the data given, The % change in Price results to an equal % change in teh quantity demanded for compact disc.
a) Convert the production function into its normal form. b) What is the firms output elasticity and returns to scale? Explain. a) Q = e^4.73 x K^0.29 x L^0.68. This is a Cobb-Douglas Production Function. b) Output elasticity of capital is 0.29, while output elasticity of labor is 0.68. 0.29 + 0.68 = 0.97 which is less than one. So the firm is experiencing decreasing returns to scale.