Week 4

Question 1

PED

Answer 1

Price elasticity of demand (demand elasticity): The % change in the quantity demanded of a good given a 1% change in the good’s price, i.e the responsiveness of demand to a change in price.

Formula- % Change in Qd
————————-
% Change in P

PED is always negative. This is because the demand curve is downward sloping.
A demand curve is more elastic if its PED value has a larger magnitude- -1.5 is more elastic than -1.

Question 1

Calculating Arc Elasticity

Answer 1

Arc elasticity of demand, for a price quantity change from (𝑄0, 𝑃0) to (𝑄1, 𝑃1), is:

Question 5

Calculating Point Elasticity

Answer 5

If we have the formula for the demand curve, we can measure the exact elasticity for a specific point.

PED= dQd / dP x P / Qd

Question 6

Perfectly Elastic Demand

Answer 6

dQd = the entire shift in supply

dP=0

PED= minus infinity

Change in expenditure is entirely due to a decrease in quantity

Question 7

Perfectly Inelastic Demand

Answer 7

dQd = 0

dP = entire shift in supply

PED = 0

Change in expenditure is entirely due to the increase in price.

Question 7

Elasticity Along the Demand Curve

Answer 7

Elasticity is different at different points on the curve.

On any linear demand curve, PED is more elastic as P increases (PED has a higher magnitude), and becomes more inelastic as P decreases m (PED has a lower magnitude).

Question 8

How are Arc and Point Elasticity Related?

Answer 8

For a linear demand curve, arc elasticity is

PEDarc = slope of Qd x (P1 + P0) / (Q1 + Q2)

And point elasticity is

PED = Slope of Qd x P0 / Q0