72 views

Uploaded by Judz Sawadjaan

About price elasticity of demand, how to calculate and you will know how to determine whether the goods are inferior and normal good. And also if it is elastic, inelastic and unit elastic.

About price elasticity of demand, how to calculate and you will know how to determine whether the goods are inferior and normal good. And also if it is elastic, inelastic and unit elastic.

Attribution Non-Commercial (BY-NC)

- Computing for Elasticity
- Elasticity of Demand
- Managerial Economics
- Elasticity Worksheet
- Chapter 4 Samuelson 18e Final
- Economics Macro and Micro Definitions
- Managerial economics basics
- Economics Hsc Paper 4
- Price Elasticity of Demand.
- bopreport5 (1)
- Tutorial Work 1 12
- Cross Elasticity of Demand
- ClassOf1 Equil Price Quantity3
- MankiwChapter08SolutionsProblems.pdf
- q Bank Microeconomics
- MGEA02_TT1_2011F_A
- ap micro problem set 2
- IBDP Economic HL Chapter 4 Notes
- Homework HelpElasticity[1]
- Elasticity of Demand

You are on page 1of 4

ECON 1101 - Spring 2010 Department of Economics University of Minnesota Notes On Price Elasticity of Demand

Lectures: Internet: Oce: Hours: M W F 9:05pm - 9:55pm (Rm. WilleyH 175)

http://www.econ.umn.edu/~amin0066

HMH 3-105 M 10:45am - 1:00pm

This handout will begin by rst giving a short review of material we covered in lecture dealing with the price elasticity of demand (PED). Then we will take a look at three examples of calculating PED. First will be the question and after that will be a solution to the problems. I would advise you to rst try to work out the examples before you check the answers.

The denition, of Price Elasticity of Demand (PED) is: Price Elasticity of Demand = Percentage Change in Quantity Demanded %QD = Percentage Change in Price %P

In order to calculate the PED we need two points on the demand curve, (QD1 , P1 ) and (QD2 , P2 ). In order to calculate the PED we use the midpoint formula QD2 QD1 QD1 + QD2 2 PED = P2 P 1 P1 + P 2 2 Once we have calculated the PED between two points on the demand curve, we can say if demand between those points is elastic, inelastic or unit elastic as follows: Demand is elastic at a certain point if PED < -1 Demand is unit elastic at a certain point if PED = -1 Demand is inelastic at a certain point if 0 < PED < -1

There are a number of factors that can determine if a demand curve will be more elastic, or more inelastic. We covered this material on Wednesday, February 17th. Four Factors Aecting PED: (1) Availability of close substitutes (2) Denition of Market (3) Amount of time (4) Necessities vs. luxuries When calculating dierent elasticities it is very important to keep in mind, what information you need to calculate a certain elasticity and what information you have available. Also, sometimes there is information that is not relevant to certain elasticities. Be sure you are aware of what information is necessary and what information is not. The following examples emphasize this point. The answers to these example problems are at the end of this handout.

Example #1

You are given market data that says when the price of pizza is $4, the quantity demanded of pizza is 60 slices and the quantity demanded of cheese bread is 100 pieces. When the price of pizza is $2, the quantity demanded of pizza is 80 slices and the quantity demanded of cheese bread is 70 pieces. Can the Price-Elasticity of Demand be calculated for either good? If so, calculate the PED.

Example #2

Consider the markets for widgets and cogs. You study survey data and observe that if widgets cost $5, then 100 widgets are demanded. You also observe that if widgets cost $3, then 150 cogs are demanded and if widgets cost $4 then 100 cogs are demanded. If cogs cost $2, then 125 cogs are demanded. Can the Price-Elasticity of Demand be calculated for either good? If so, calculate the PED.

Example #3

Consider the market for widgets and cogs (again). You study survey data and observe that if widgets cost $5, then 100 widgets are demanded and 60 cogs are demanded. You also observe that if widgets cost $3, then 200 widgets are demanded and 100 cogs are demanded. If cogs cost $2, then 125 cogs are demanded. Can the Price-Elasticity of Demand be calculated for either good? If so, calculate the PED.

Department of Economics

University of Minnesota

Minneapolis, MN 55454

Solution to Example #1

Can the Price-Elasticity of Demand be calculated for either good? If so, calculate the PED. In order to calculate PED we need two (quantity, price) pairs for one good (two points along a certain goods demand curve). We are given this information for pizza. We are never given this information for cheese bread. We have two (quantity, price) pairs for pizza. Specically, (QD1 , P1 ) = (60, $4) and (QD2 , P2 ) = (80, $2) . Then, plugging these numbers into the above formula, we obtain: QD2 QD1 80 60 20 QD1 + QD2 60 + 80 140 20 20 3 3 2 2 2 70 PED = = = = = = $2 70 2 7 P2 P 1 $2 $4 $2 $3 P1 + P 2 $4 + $2 $6 2 2 2 Given this data, the PED is 3 7

NOTE: This tells us that given these two points, this demand curve for pizza is inelastic. We know this because the PED is between 0 and -1.

Solution to Example #2

Can the Price-Elasticity of Demand be calculated for either good? If so, calculate the PED. In order to calculate PED we need two (quantity, price) pairs for one good (two points along a certain goods demand curve). We are not given this information for either widgets or cogs. We cannot calculate PED for either good in this case.

Department of Economics

University of Minnesota

Minneapolis, MN 55454

Solution to Example #3

Can the Price-Elasticity of Demand be calculated for either good? If so, calculate the PED. In order to calculate PED we need two (quantity, price) pairs for one good (two points along a certain goods demand curve). We are given this information for widgets. We are never given this information for cogs. We have two (quantity, price) pairs for pizza. Specically, (QD1 , P1 ) = (100, $5) and (QD2 , P2 ) = (200, $3) . Then, plugging these numbers into the above formula, we obtain: QD2 QD1 200 100 100 QD1 + QD2 100 + 200 300 100 100 4 4 2 2 2 150 PED = = = = = = $2 150 2 3 P 2 P1 $3 $5 $2 $4 P 1 + P2 $5 + $3 $8 2 2 2 Given this data, the PED is 4 3

NOTE: This tells us that given these two points, this demand curve for widgets is elastic. We know this because the PED is less then -1.

Department of Economics

University of Minnesota

Minneapolis, MN 55454

- Computing for ElasticityUploaded byDerrek Dullesco
- Elasticity of DemandUploaded bychaitu34
- Managerial EconomicsUploaded bydimitriou1973
- Elasticity WorksheetUploaded byHamza Bin Zubair
- Chapter 4 Samuelson 18e FinalUploaded byRaza Sami
- Economics Macro and Micro DefinitionsUploaded byEliot Taylor
- Managerial economics basicsUploaded byPashupati Nath
- Economics Hsc Paper 4Uploaded byAMIN BUHARI ABDUL KHADER
- Price Elasticity of Demand.Uploaded bysonu_dps
- bopreport5 (1)Uploaded byrachna357
- Tutorial Work 1 12Uploaded bypeter kong
- Cross Elasticity of DemandUploaded byUgly Duckling
- ClassOf1 Equil Price Quantity3Uploaded byClassOf1.com
- MankiwChapter08SolutionsProblems.pdfUploaded byTanya Singh
- q Bank MicroeconomicsUploaded bysaid
- MGEA02_TT1_2011F_AUploaded byexamkiller
- ap micro problem set 2Uploaded byapi-244986640
- IBDP Economic HL Chapter 4 NotesUploaded byAditya Rathi
- Homework HelpElasticity[1]Uploaded byPraveen Kumar
- Elasticity of DemandUploaded bysaravmba
- GladsUploaded byGladys
- Lecture-11.docxUploaded byRohitPatial
- PDF Marketing1Uploaded byAye Buenaventura
- Derivatives and ApplicationUploaded byÐhammaþriyaKamßle
- DemandUploaded byvie21_verzon
- MICROECONOMICUploaded bySashikala Garnaison
- HW 2 SolutionsUploaded byAbhi
- Eco100y1 Wolfson Tt1 2010fUploaded byexamkiller
- ABM 507 Pricing Methods & StrategiesUploaded byShanmukh Sagar
- US Federal Trade Commission: ClarkLevendahlFatPaperJune%2020061Uploaded byftc

- elasticitykkkkUploaded byzafar ali khan
- waaaaaaaaaaaUploaded byJudz Sawadjaan
- SM-CH10Uploaded byJudz Sawadjaan
- 1010-Chapter9Uploaded bymatrix93
- Chart of AccountsUploaded byJudz Sawadjaan
- Imperfect CompetitionUploaded byJudz Sawadjaan
- types of ISUploaded byfnab@hotmail.com
- Ch 16 Standard Costing, Variance Analysis, Kaizen CostingUploaded byHimani Aggarwal
- Chap7- Consumer ChoiceUploaded byJudz Sawadjaan
- Prac2 Pre BoardUploaded byJudz Sawadjaan
- Voucher InformationUploaded byJudz Sawadjaan
- Receivables ManagementUploaded byJudz Sawadjaan
- Working Capital FinanceUploaded byYeoh Mae
- Testbank for Business FinanceUploaded byMadina Suleimenova
- Test Review 3Uploaded byJudz Sawadjaan
- LearningStyleSurvey MAXSA IGUploaded byJudz Sawadjaan
- Elasticity DemandUploaded byJudz Sawadjaan
- Micro Lecture 2Uploaded byJudz Sawadjaan
- Introdution to Economics (New)Uploaded byJudz Sawadjaan
- Economics[1]Uploaded byJudz Sawadjaan
- Prac I- Inventory,Govt Grant & Borrowing CostUploaded byjudimar_sawadjaan
- Chap 31InternationalEconomyUploaded byJudz Sawadjaan
- Chap 30MoneyGrowthInflationUploaded byJudz Sawadjaan
- Chap 29MonetarySystemUploaded byJudz Sawadjaan
- Chap 25GrowthUploaded byJudz Sawadjaan
- Chap 24CostofLivingUploaded byJudz Sawadjaan
- MeasuringGDPUploaded byJai Bhoj
- Chap20- Income Distribution and PovertyUploaded byJudz Sawadjaan
- CostsUploaded bygulfishanmirza

- Present as i from Prof Iwan UBUploaded byalkirom
- Consultancy SkillsUploaded byacheron_p
- Gitau Samuel Cover LetterUploaded byAnonymous CL6pN7l
- Philippine Financial Reporting Standards-2Uploaded byIrene
- International FinanceUploaded byllin63
- Retail Kids Wear Store Business PlanUploaded byMirza Shakeel
- GS1 GTIN Allocation RulesUploaded byradar200
- Indonesia - Dahlan SiamatUploaded byAsian Development Bank
- DIMENSIONS OF SOCIAL WELFAREUploaded byDr.K.DHAMODHARAN
- Vice President - Research or Director - Equity Research or DirecUploaded byapi-77754476
- How Taxes and Subsidies Affect Prices QuantitiesUploaded byKarina Chávez Enríquez
- BepUploaded byMohamed Rafiq Ghazali
- Project Management Processes PMBOK4Uploaded bymytest2k
- 82574093-Internet-Banking.docxUploaded byRajesh Tyagi
- Features of Fixed Income SecuritiesUploaded byalmirb7
- Simple Annuity 1Uploaded byKelvin BarceLon
- Case of Study Organizational BehaviorUploaded bygabrielasoliis
- Ex3 2015F Assignment2 Franca Lehfeldt [a] BurberryUploaded byscoutali
- Managerial Economics Course Handout 2017-18Uploaded bySunil Kumar Palikela
- Southwest Airlines- The Industry’s Dominant Economic FeaturesUploaded byMevan Goonetilleke
- 201Uploaded byMohit Choudhary
- Lito Tayag: Accenture - Scaling the Business, Growing the ImpactUploaded byJD
- 8 Format. Man-A Study on Capital Asset Pricing Model With Reference to BSEUploaded byImpact Journals
- IPE MDP Training Calendar 2015-16Uploaded byRanjan Kumar Mishra
- Joel Beinin - Political Islam and New Global EconomyUploaded bymimem
- Practicing Audit 3Uploaded byKelin Đoàn
- Chapter 7 Grand Strategies(1)Uploaded byFarhan Badakshani
- Department of Labor: ca-7bUploaded byDepartment of Labor
- Deborah Kobes: ‘Out of Control?: local democracy failure and fiscal control boards’Uploaded byDiálogo
- Effect of Visual Merchandising on Buying Behaviour of CustomersUploaded byasifudaula