Price Elasticity of Demand Example Questions Review First a quick review of Price Elasticity of Demand from lecture on 02 19 09 The definition 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 We use the midpoint formula so QD2 QD1 QD2 PED P2 P2 QD1 2 P1 P1 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 Demand is elastic at a certain point if PED 1 Demand is inelastic at a certain point if 0 PED 1 Demand is unit elastic at a certain point if PED 1 There are a number of factors that can determine if a demand curve will be more elastic or more inelastic we will talk more about these factors on Tuesday 02 24 09 Four Factors Affecting PED 1 2 3 4 Availability of close substitutes Necessities vs luxuries Definition of Market Amount of time 1 When calculating different 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 2 Answers to Example Questions 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 In order to calculate PED we need two quantity price pairs for one good two points along a certain good s demand curve We are given this information for pizza We are never given this information for cheese bread If so calculate the PED QD2 QD1 QD2 We need to use the formula PED P2 P2 QD1 2 P1 P1 2 We have two quantity price pairs for pizza Specifically QD1 P1 60 4 and QD2 P2 80 2 Then plugging these numbers into the above formula we obtain 80 60 20 80 60 2 3 3 2 70 2 4 2 7 2 7 2 4 3 2 Given this data the PED is 3 7 NOTE that 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 3 Example 2 Consider the market for widgets 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 In order to calculate PED we need two quantity price pairs for one good two points along a certain good s demand curve We are not given this information for either widgets or cogs We cannot calculate PED for either good in this case 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 In order to calculate PED we need two quantity price pairs for one good two points along a certain good s demand curve We are given this information for widgets We are never given this information for cogs If so calculate the PED QD2 QD1 QD2 We need to use the formula PED P2 P2 QD1 2 P1 P1 2 We have two quantity price pairs for widgets Specifically QD1 P1 100 5 and QD2 P2 200 3 Then plugging these numbers into the above formula we obtain 4 200 100 200 100 100 100 4 2 4 4 2 150 2 150 2 3 5 3 2 3 3 5 4 2 Given this data the PED is 4 3 NOTE that this tells us that given these two points this demand curve for pizza is elastic We know this because the PED is less than 1 5