ECO100Y5 Chapter 5: Chapter 5 (Using Supply & Demand)

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Elasti(cid:272)it(cid:455), effe(cid:272)ts of pri(cid:272)e changes, pri(cid:272)e floors/ceilings, ta(cid:454)es & su(cid:271)sidies. It depends on which is greater: the effect of the change in price or the effect of the change in quantity. Elasticity is a measure of the sensitivity of changes in one variable to changes in another. Elastic demand is when a change in price causes a relatively large change in quantity demanded. We find the elasticity of demand by comparing percent change in quantity demanded vs the percent change in price. Price elasticity of demand ( ) = | (cid:2900)(cid:2915)r(cid:2913)(cid:2915)(cid:2924)(cid:2930) (cid:4666)%(cid:4667) (cid:2887)(cid:2918)a(cid:2924)(cid:2917)(cid:2915) (cid:2919)(cid:2924) (cid:2901)(cid:2931)a(cid:2924)(cid:2930)(cid:2919)(cid:2930)y (cid:2888)(cid:2915)(cid:2923)a(cid:2924)(cid:2914)(cid:2915)(cid:2914) (cid:2900)(cid:2915)r(cid:2913)(cid:2915)(cid:2924)(cid:2930) (cid:4666)%(cid:4667) (cid:2887)(cid:2918)a(cid:2924)(cid:2917)(cid:2915) (cid:2919)(cid:2924) (cid:2900)r(cid:2919)(cid:2913)(cid:2915) Price elasticity of demand ( ) = | (cid:2901)(cid:2888) / avg (cid:2925)(cid:2916) (cid:2901)(cid:2888) Always negative so take absolute value to make it positive! Inelastic demand is when a change in price causes a relatively small change in quantity demanded. In other words, quantity demanded is not sensitive to price changes.

Related Questions

PROBLEM SET ONE -2 - PRICE-ELASTICITY OF DEMAND

	P₁	P₂	Q_D1	Q_D2	I	II	III	IV	V
1	1	2	10	5
2	5	3	40	90
3	12	20	200	200
4	3	2	9	9
5	0.40	1.40	30	15
6	1.2	4.0	20	15
7	7.5	4.6	40	30
8	5	5.000â¦01	1x10⁶	0
9	5	4.9999â¦.	10	1x10⁹
10	6	12	12	6
11	18	36	360	180
12	7	15	24	16
13	7	16	78	78
14	25	65	150	100
15	65	91	1300	780
16	4	5	21	11
17	8	4	30	54
18	140	275	625	495
19	78	91	780	780
20	91	78	780	780

Column I - determine the Price-Elasticity of Demand Coefficient. Find material in Chapter 6 and the Powerpoint of Elasticity Chap 004 19e.ppt

change in quantity demanded change in price

E_D = ---------------------------------------- â ----------------------------

sum of quantities demanded / 2 sum of prices / 2

The data in the first four columns represent price (P) and quantity demanded (Qd) in time 1 (before change in price) and time 2 (after change in price). Note that results should be expressed in absolute terms (see paragraph Elimination of Minus Sign). For example, -1 should be expressed as â1â.

Column II â Based on topic concerning Interpretations of E_D, indicate which applies based on how the quantity demanded changed subsequent to a change in price (elastic, inelastic, etc.)

Column III - you need to determine if the good in question would be considered a necessity, a luxury or neither.

Column IV â Indicate, in monetary terms, how much is the change in total revenue or total expenditure (TR = P X Q_D), from the first price level to the second.

Column V - the direction of the change, also in monetary terms, that is, increasing or decreasing, and by how much? (show a + sign for increasing and a â sign for decreasing).

Note: for any monetary result please include the applicable currency symbol ($, â¬, etc.)

salmoneagle868

that occurs as the result of Price elasticity of demand is defined as the percentage change in a one percent change in A. Consumer expenditure, price. B. Quantity demanded, supply. C. Quantity demanded, price. D. Consumer expenditure, supply.

Part II – Give an adequate explanation on the following questions (20%) – 4 marks each

Discuss the factors that determine the income elasticity of demand.
Explain the conditions for oligopoly market structure to exist.
What is increasing returns to scale? and describe at least three causes of increasing returns to scale?
What is the relation between productivity and cost? Describe the association using equations for MC & MP, and AP & AC
Do monopoly firms get a normal profit or supernormal profit in the short run? Explain how?

Part III – Problem Solving (20%)

If a consumer increases her quantity of ice cream consumed by 100% when her income rises by 25%. Calculate her income elasticity of demand for the ice cream and interpret the result. (2marks)
If Qs = -20 + 10p, and Qd = 400 - 20p, what is the equilibrium price and quantity? (2 marks)

Assume you are managing a food processing plant in Ethiopia. The demand function for one of your product is given as Qd=50-2p. (8 marks)
A) Find the point price elasticity if price is 15 ETB? Is it elastic or inelastic?
b) How do you interpret the elasticity result?
c) In order to get more revenue what will be your recommendation. Is it to increase price or decrease price? Why?

d) Describe at least four determinants of the price elasticity demand for the food product?

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ECO100Y5 Chapter 5: Chapter 5 (Using Supply & Demand)

ECO100Y5 Full Course Notes

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