Suppose that over the past year the price of laptop computers has fallen from $2

Question

Suppose that over the past year the price of laptop computers has fallen from $2,000 to $1,800. Over the same time period, sales to consumers have increased from 700,000 to 800,000 units. One way to calculate the elasticity of demand from these two points is use the midpoint method. In words, here is what you do:

1. Calculate the change in quantity.
2. Divide it by the midpoint of the two quantities to get one measure of the percentage change in quantity. The midpoint is equal to the sum of the two quantities divided by 2.
3. Calculate the change in price.
4. Divide it by the midpoint of the two prices to get a measure of the percentage change in price.
5. Divide the percentage change in quantity by the percentage change in price.
6. Take the absolute value of the fraction so that you have a positive number. (Note: Some textbooks do not take the absolute value and define the elasticity of demand as a negative number.)

Using this method, the elasticity of demand for laptop computers is about:


Suppose that over the past year the price of laptop computers has fallen from $2,000 to $1,800. Over the same time period, sales to consumers have increased from 700,000 to 800,000 units. One way to calculate the elasticity of demand from these two points is use the midpoint method. In words, here is what you do:

1. Calculate the change in quantity.
2. Divide it by the midpoint of the two quantities to get one measure of the percentage change in quantity. The midpoint is equal to the sum of the two quantities divided by 2.
3. Calculate the change in price.
4. Divide it by the midpoint of the two prices to get a measure of the percentage change in price.
5. Divide the percentage change in quantity by the percentage change in price.
6. Take the absolute value of the fraction so that you have a positive number. (Note: Some textbooks do not take the absolute value and define the elasticity of demand as a negative number.)

Using this method, the elasticity of demand for laptop computers is about:

Explanation / Answer

price elasticity = % change in quantity demanded / % change in price

% change in quantity demanded = (new quantity demanded - old quantity demanded)/old quantity demanded
= (800,000 - 700,000)/800,000 = 100,000/700,000 = 0.14 = 14%

% change in price = (new price - old price)/old price
= (1,800 - 2,000)/2,000 = -200/2,000 = -0.10 = -10%

-0.14 / .10 = -1.4 <--we ignore the negative value
We conclude that the price elasticity of demand when the price increases from $2,000 to $1,800 is -1.4

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)

price elasticity is greater than one, so demand is elastic.

original quantity = (B) 800,000
new quantity = (D) 700,000
average quantity = 800,000 + 700,000 / 2 = (B) 750,000
change in quantity = (B) 100,000
percentage change in quantity = (A) 14%
original price = (B) $2,000
new price = (C) $1,800
change in price = (B) $-200
percentage change in price = (B) -10%
elasticity of demand for laptop computers is about = (D) 1.4

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.