DOC PREVIEW
U of M ECON 1101 - Review of Price Elasticity of Demand

This preview shows page 1 out of 4 pages.

Save
View full document
View full document
Premium Document
Do you want full access? Go Premium and unlock all 4 pages.
Access to all documents
Download any document
Ad free experience
Premium Document
Do you want full access? Go Premium and unlock all 4 pages.
Access to all documents
Download any document
Ad free experience

Unformatted text preview:

1. Review of Price Elasticity of Demand2. Examples of Price Elasticity of DemandExample #1Example #2Example #3Solution to Example #1Solution to Example #2Solution to Example #3Principles of MicroeconomicsECON 1101 - Spring 2010Department of EconomicsUniversity of MinnesotaNotes On Price Elasticity of DemandLectures: M W F 9:05pm - 9:55pm (Rm. WilleyH 175)Internet: http://www.econ.umn.edu/~amin0066Office: HMH 3-105Hours: M 10:45am - 1:00pmInstructor: Minesh D. AminEmail: [email protected]: (612) 624-9345Fax:This handout will begin by first giving a short review of material we covered in lecture dealing withthe price elasticity of demand (PED). Then we will take a look at three examples of calculatingPED. First will be the question and after that will be a solution to the problems. I would adviseyou to first try to work out the examples before you check the answers.1. Review of Price Elasticity of DemandThe definition, of Price Elasticity of Demand (PED) is:Price Elasticity of Demand =Percentage Change in Quantity DemandedPercentage Change in Price=%∆QD%∆PIn 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 formulaPED =QD2− QD1QD1+ QD22P2− P1P1+ P22Once we have calculated the PED between two points on the demand curve, we can say if demandbetween 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 < -12 Notes On Price Elasticity of DemandThere are a number of factors that can determine if a demand curve will be more elastic, or moreinelastic. We covered this material on Wednesday, February 17th.Four Factors Affecting PED:(1) Availability of close substitutes(2) Definition of Market(3) Amount of time(4) Necessities vs. luxuriesWhen calculating different elasticities it is very important to keep in mind, what information youneed to calculate a certain elasticity and what information you have available. Also, sometimes thereis information that is not relevant to certain elasticities. Be sure you are aware of what informationis necessary and what information is not. The following examples emphasize this point. The answersto these example problems are at the end of this handout.2. Examples of Price Elasticity of DemandExample #1You are given market data that says when the price of pizza is $4, the quantity demanded of pizzais 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 #2Consider 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 aredemanded and if widgets cost $4 then 100 cogs are demanded. If cogs cost $2, then 125 cogs aredemanded.• Can the Price-Elasticity of Demand be calculated for either good?• If so, calculate the PED.Example #3Consider the market for widgets and cogs (again). You study survey data and observe that ifwidgets cost $5, then 100 widgets are demanded and 60 cogs are demanded. You also observe thatif 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 55454Principles of Microeconomics (ECON1101) 3Solution to Example #1Can the Price-Elasticity of Demand be calculated for either go od? If so, calculate thePED.In order to calculate PED we need two (quantity, price) pairs for one good (two points along acertain goods demand curve). We are given this information for pizza. We are never given thisinformation for cheese bread.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:PED =QD2− QD1QD1+ QD22P2− P1P1+ P22=80 − 6060 + 802$2 − $4$4 + $22=201402− $2$62=2070−$2$3=2070× −32= −37Given this data, the PED is −37NOTE: This tells us that given these two points, this demand curve for pizza is inelastic. Weknow this because the PED is between 0 and -1.Solution to Example #2Can the Price-Elasticity of Demand be calculated for either go od? If so, calculate thePED.In order to calculate PED we need two (quantity, price) pairs for one good (two points along acertain goods demand curve). We are not given this information for either widgets or cogs. Wecannot calculate PED for either good in this case.Department of Economics University of Minnesota Minneapolis, MN 554544 Notes On Price Elasticity of DemandSolution to Example #3Can the Price-Elasticity of Demand be calculated for either go od? If so, calculate thePED.In order to calculate PED we need two (quantity, price) pairs for one good (two points along acertain goods demand curve). We are given this information for widgets. We are never given thisinformation for cogs.We have two (quantity, price) pairs for pizza. Specifically, (QD1, P1) = (100, $5) and (QD2, P2) =(200, $3) . Then, plugging these numbers into the above formula, we obtain:PED =QD2− QD1QD1+ QD22P2− P1P1+ P22=200 − 100100 + 2002$3 − $5$5 + $32=1003002− $2$82=100150−$2$4=100150× −42= −43Given this data, the PED is −43NOTE: This tells us that given these two points, this demand curve for widgets is elastic. Weknow this because the PED is less then -1.Department of Economics University of Minnesota Minneapolis, MN


View Full Document

U of M ECON 1101 - Review of Price Elasticity of Demand

Download Review of Price Elasticity of Demand
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view Review of Price Elasticity of Demand and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Review of Price Elasticity of Demand 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?