Price Elasticity of Demand
Assignment 2
Price Elasticity Of Demand
Price Elasticity of Demand is the quantitative measure of consumer behavior whereby there is indication of response of quantity demanded for a product or service to change in price of the good or service ( Mankiw,2007). The Price Elasticity of Demand is calculated using either the point method or the midpoint method.
The Point Method
Price Elasticity of Demand = Percentage change of Quantity Demanded
Percentage change of Price
The Midpoint Method
Price Elasticity of Demand = (Q2 ' Q1) \ [ (Q2 + Q1)/2]
(P2 ' P1) \ [ (P2 + P1)/2]
Were:
Q1= initial Quantity Demanded
Q2 = new Quantity Demanded
P1=Initial Price
P2= new Price
(Source : Mankiw 2007)
A good or service can either be elastic, inelastic or unit elastic. When the price elasticity of demand of a commodity is elastic this is when the quantity demanded of a good or service responds significantly to the increase or decrease in price. Therefore after calculation the answer is greater than one making it elastic which means that increase in price decreases quantity demanded which in turn causes a decrease in total revenue because the decrease in quantity demanded will be proportionally larger than the increase in price. (Mankiw, 2007).
The good or service has either relatively elastic demand ( diagram (d) ) or perfectly elastic demand ( diagram (a) ). The difference of these two is that perfectly elastic has a Price Elasticity of Demand of infinity and this means that a small change in price would lead to an infinitively large increase in demand and this is shown in the diagram below (http://ecoteacher.asn.au/Demand/elastsli/e14.htm, n.d). While on the other hand Relative Elastic Demand is when the Price Elasticity of Demand is more than one and this shown in the diagram (d).
Perfectly Elastic Demand
(a)[pic]( Source : http://ecoteacher.asn.au/Demand/elastsli/e14.htm,n.d)
Perfectly Inelastic
Price Elasticity Of Demand
Price Elasticity of Demand is the quantitative measure of consumer behavior whereby there is indication of response of quantity demanded for a product or service to change in price of the good or service ( Mankiw,2007). The Price Elasticity of Demand is calculated using either the point method or the midpoint method.
The Point Method
Price Elasticity of Demand = Percentage change of Quantity Demanded
Percentage change of Price
The Midpoint Method
Price Elasticity of Demand = (Q2 ' Q1) \ [ (Q2 + Q1)/2]
(P2 ' P1) \ [ (P2 + P1)/2]
Were:
Q1= initial Quantity Demanded
Q2 = new Quantity Demanded
P1=Initial Price
P2= new Price
(Source : Mankiw 2007)
A good or service can either be elastic, inelastic or unit elastic. When the price elasticity of demand of a commodity is elastic this is when the quantity demanded of a good or service responds significantly to the increase or decrease in price. Therefore after calculation the answer is greater than one making it elastic which means that increase in price decreases quantity demanded which in turn causes a decrease in total revenue because the decrease in quantity demanded will be proportionally larger than the increase in price. (Mankiw, 2007).
The good or service has either relatively elastic demand ( diagram (d) ) or perfectly elastic demand ( diagram (a) ). The difference of these two is that perfectly elastic has a Price Elasticity of Demand of infinity and this means that a small change in price would lead to an infinitively large increase in demand and this is shown in the diagram below (http://ecoteacher.asn.au/Demand/elastsli/e14.htm, n.d). While on the other hand Relative Elastic Demand is when the Price Elasticity of Demand is more than one and this shown in the diagram (d).
Perfectly Elastic Demand
(a)[pic]( Source : http://ecoteacher.asn.au/Demand/elastsli/e14.htm,n.d)
Perfectly Inelastic