ELASTICITY DISCUSSION QUESTIONS ) What does price elasticity of demand measure?
ID: 1162058 • Letter: E
Question
ELASTICITY DISCUSSION QUESTIONS ) What does price elasticity of demand measure? When is demand elastic? Inelastict? Unit elastic? If price elasticity of demand is 3 and the price increases how much will Quantity demanded decrease by? For every 1% increase is price quanti demanded will go down by down for exam focus more on understanding what elasticity of demand means. ? Given that you will have the formula written is 2) Suppose the price of gasoline in July 2016 averaged $1.35 a gallon and 15 million gallons of gasoline were sold. In December of 2016, the price averaged $2.15 a gallon and 14 million gallons were sold. If the demand for gasoline did not shift between these months, use the midpoint formula to calculate the price elasticity of demand. Is it elastic or inelastic?Explanation / Answer
1) The elasticity of Demand measures the extent to which quantity demanded of a commodity increase or decrease in response to increase or decrease in any of its quantitative determinants. The elasticity of demand measures the responsiveness of the quantity demanded of a good, to change in its price, price of other goods and change in consumer's income.
When percentage change in quantity demanded is greater than the percentage change in price then demand is said to be elastic. When percentage change in quantity demanded is equal to the percentage change in price then demand is said to be unit elastic. When percentage change in quantity demanded is less than the percentage change in price then demand is said to be inelastic.
When price elasticity of demand is 3 then it means 1% increase in price causes 3% decrease in quantity demanded.
Ed = % change in quantity demanded / % change in price
2) Ed = (P1 + P2)/(Q1 + Q2) x (Q2 - Q1)/(P2 - P1)
P1 = 1.35, P2 = 2.15, Q1 = 15 million and Q2 = 14 million
Ed = 3.5/29 million x - 1million / 0.8 = - 3.5 million/23.2million = - 0.15
Ed < 1 so demand is inelastic.
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