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    Elasticity: Q Q Q P P P

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    samio
    This document defines and provides formulas to calculate different types of elasticity, including: 1) Price elasticity of demand - Measures responsiveness of quantity demanded to price changes. An example calculates price elasticity of -1.75, indicating demand is elastic. 2) Cross elasticity of demand - Measures responsiveness of quantity demanded of one good to price changes in another. An example calculates cross elasticity of 0.20, indicating sausages and hamburgers are substitutes. 3) Income elasticity of demand - Measures responsiveness of quantity demanded to changes in income. An example calculates income elasticity to determine if a good is normal or inferior.

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    Elasticity: Q Q Q P P P

    Uploaded by

    samio
    61 views5 pages
    This document defines and provides formulas to calculate different types of elasticity, including: 1) Price elasticity of demand - Measures responsiveness of quantity demanded to price changes. An example calculates price elasticity of -1.75, indicating demand is elastic. 2) Cross elasticity of demand - Measures responsiveness of quantity demanded of one good to price changes in another. An example calculates cross elasticity of 0.20, indicating sausages and hamburgers are substitutes. 3) Income elasticity of demand - Measures responsiveness of quantity demanded to changes in income. An example calculates income elasticity to determine if a good is normal or inferior.

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    This document defines and provides formulas to calculate different types of elasticity, including: 1) Price elasticity of demand - Measures responsiveness of quantity demanded to price changes. An example calculates price elasticity of -1.75, indicating demand is elastic. 2) Cross elasticity of demand - Measures responsiveness of quantity demanded of one good to price changes in another. An example calculates cross elasticity of 0.20, indicating sausages and hamburgers are substitutes. 3) Income elasticity of demand - Measures responsiveness of quantity demanded to changes in income. An example calculates income elasticity to determine if a good is normal or inferior.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    61 views5 pages

    Elasticity: Q Q Q P P P

    Uploaded by

    samio
    This document defines and provides formulas to calculate different types of elasticity, including: 1) Price elasticity of demand - Measures responsiveness of quantity demanded to price changes. An example calculates price elasticity of -1.75, indicating demand is elastic. 2) Cross elasticity of demand - Measures responsiveness of quantity demanded of one good to price changes in another. An example calculates cross elasticity of 0.20, indicating sausages and hamburgers are substitutes. 3) Income elasticity of demand - Measures responsiveness of quantity demanded to changes in income. An example calculates income elasticity to determine if a good is normal or inferior.

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    Elasticity

    1. Elasticity: The general concept of elasticity provides a technique for estimating the response
    of one variable to change in another variable.

    2. Price Elasticity of Demand: A measure of the responsiveness of quantity demanded to


    change in price.

    Percentage change in quantity demanded


    3. Ed = Percentage change in price

    % Q d
    = % P

    Q2  Q1
    100%
    Q1
    P2  P1
     100%
    = P1

    Q2  Q1
    Q1
    P2  P1
    Ed = P1

    Where, Ed = Price elasticity of demand coefficient

    Question: On Tuesday, price and quantity demanded are $7 and 120 units, respectively. Ten
    days later, price and quantity demanded are $6 and 150 units, respectively. What is the price
    elasticity of demand between the $7 and $6 prices?

    Answer: Given, Q1 = 120 units, Q 2 = 150 units, P1 = $7, P2 = $6


    150  120
    120
    67
    Ed = 7

    30
    120
    1
    = 7

    = - 1.75

    Minus (-) sign should be ignored or excluded because it shows only the relationship between
    price and quantity demanded. The demand for this product is elastic of E d>1. If there is a change
    in price, quantity demanded will change (in the opposite direction) by 1.75 times the percentage
    change in price.

    3. Price elasticity of demand and total revenue relationship.

    Price elasticity of demand Price change Total revenue


    Elastic Increase Decrease
    Decrease Increase
    Inelastic Increase Increase
    Decrease Decrease
    Unit elastic Increase No change
    Decrease No change

    4. Cross Elasticity of Demand: A measure of the responsiveness in quantity demanded of one


    good to change in the price of another good.

    Percentage change in quantity demanded of one good


    Ec = Percentage change in price of another good
    % Q y

    = %Px

    Q y2 -Q y1
    100%
    Q y1
    Px 2 -Px 1
     100%
    Px1
    =
    Q y2 -Q y1
    Q y1
    Px 2 -Px 1
    Px1
    Ec =

    Where, Ec = Cross elasticity of demand coefficient,


    X and y are two goods which can be substitutes or complements or independent of each other.

    Ec > 0 Goods are substitutes,


    Ec < 0 Goods are complements
    Ec = 0 Goods are independent

    Question: When the price of sausages is $2.00 per pound, consumers buy 50 pounds of
    hamburger. When the price of sausages rises to $4.00 per pound, 60 pounds of hamburger are
    purchased. Now calculate the cross elasticity of demand between sausages and hamburger and
    also explain the elasticity coefficient.

    Answer: Given, Px1 = $2.00, Px2 = $4.00


    Qy1 = 50 pounds, Qy2 = 60 pounds
    Q y2 -Q y1
    Q y1
    Px 2 -Px 1
    Px1
    Ec =
    60  50
    50
    42
    = 2
    10
    50
    2
    = 2
    Ec = 0.20
    Ec > 0, so goods are substitutes each other. And the cross elasticity of demand is inelastic.

    5. Income Elasticity of Demand: A measure of the responsiveness of quantity demanded to


    change in income.

    Percentage change in quantity demanded


    Ey 
    Percentage change in income

    %Qd

    % Y

    Q 2 -Q1
    Q1

    Y2 -Y1
    Y1

    Where, Ey = income elasticity coefficient


    If Ey > 0, good is normal
    Ey < 0, good is inferior
    Question: Suppose, when your salary is $50,000, you purchase 20 steaks per year. When your
    salary rises to $75,000, you purchase 25 steaks per year. Calculate the income elasticity of
    demand and explain the elasticity coefficient.

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