Elasticity

Principles of Economics

Suppose the price elasticity of demand for text books is two and the price of the text book is increased by 10%. By how much does the quantity demand fall? Inter the result and discuss reasons for the fall in quantity demand?

Answer:

Given:

Price elasticity of demand for text books = 2

Price  elasticity  of  textbook  up by  10%

Solution:

    % Change  in quantity                ?

     ------------------------------- =   -------------- = 2

     % Change  in  price                   10%

Result:

Quantity  demand  is  down  by =  - 20%

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Elasticity of demand

Ped(Price elasticity of demand) measures the responsiveness of demand for a product following a change in its own price.

The formula for calculating the co-efficient of elasticity of demand is:

Percentage change in quantity demanded divided by the percentage change in price

Since changes in price and quantity nearly always move in opposite directions, economists usually do not bother to put in the minus sign. We are concerned with the co-efficient of elasticity of demand.

Understanding values for price elasticity of demand (Ped)

  If Ped = 0 then demand is said to be perfectly inelastic. This means that demand does not change at all when the price changes – the demand curve will be vertical

  If Ped is between 0 and 1 (i.e. the percentage change in demand from A to B is smaller than the percentage change in price), then demand is inelastic. Producers know that the change in demand will be proportionately smaller than the percentage change in price

  If Ped = 1 (i.e. the percentage change in demand is exactly the same as the percentage change in price), then demand is said to unit elastic. A 15% rise in price would lead to a 15% contraction in demand leaving total spending by the same at each price level.

  If Ped > 1, then demand responds more than proportionately to a change in price i.e. demand is elastic....