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Price Elasticity of Demand (Ed) (QD(NEW) -QD(OLD)) /[(QD(NEW)+QD(OLD))/2]

(P(NEW) -P(OLD)) /[(P(NEW)+P(OLD))/2]

Ignore the MINUS sign in the coefficient for Price Ed

1. When bicycles were $50, the quantity was 20/day, however, when the price rose to $60 the Quantity Demanded dropped to 15.

Calculate coefficient: (15 – 20) / [(15 + 20)/2] = -5/17.5 = -.286 = -1.57

(60 – 50) / [(60 + 50)/2] = 10 / 55 .182

Cite Elasticity: Elastic

What happens to

TOTAL REVENUE: TR decreases

1. When price drops from $1.00 to $.70, Quantity Demanded increased from 50 to 75 units.

Calculate coefficient:

Cite Elasticity:

What happens to

TOTAL REVENUE:

1. Price dropped from $0.70 to $0.60 and Quantity Demanded rose from 10 to 12 units.

Calculate coefficient:

Cite Elasticity:

What happens to

TOTAL REVENUE:

1. Price rises from $1.50 to $2 and Quantity Demanded decreases from 1000 to 900 units.

Calculate coefficient:

Cite Elasticity:

What happens to

TOTAL REVENUE:

1. When Cottonwood City Transit Authority raised bus fares, its total revenue increased, which shows that demand for travel is: ELASTIC/INELASTIC

EXPLAIN:

Absolute Value of

Elasticity Coefficient

Demand Is:

Description

Impact on Total Revenue (TR) of a:

Price Increase Price Decrease

Greater than 1 (Ed > 1)

Elastic or relatively elastic

Quantity Demanded changes by a larger percentage than does Price

TR decreases

TR increases

Equal to 1 (Ed = 1)

Unit or unitary elastic

Quantity Demanded changes by the same percentage as does Price

TR is unchanged

TR is unchanged

Less than 1 (Ed < 1)

Inelastic or relatively inelastic

Quantity Demanded changes by a smaller percentage than does Price

TR increases

TR decreases

Income Elasticity (EI) (QD(NEW) -QD(OLD)) /[(QD(NEW)+QD(OLD))/2]

(I(NEW) -I(OLD)) /[(I(NEW)+I(OLD))/2]

1. Income rose from $300 to $350/week and QD fell from 8 to 4 units.

Calculate coefficient: (4 – 8) / [(4 + 8)/2] = - 4 /6 = - .667 = - 4.33

(350 – 300) / [(350 + 300)/2] = 50 / 325 = .154

Cite Elasticity: Elastic

Type of good: Inferior Good

1. Income fell from $500 to $250/week and QD increased from 1 to 5 units.

Calculate coefficient:

Cite Elasticity:

Type of good:

1. Income increased from $400 to $700/week and QD rose from 4 to 10/week.

Calculate coefficient:

Cite Elasticity:

Type of good:

1. Income fell from $1000 to $600/week and QD fell from 12 to 10 units/week.

Calculate coefficient:

Cite Elasticity:

Type of good:

1. Income rose from $24,000 to $28,000/year and QD for books rose from 40 to 60/year.

Calculate coefficient:

Cite Elasticity:

Type of good:

Value of Coeffficient

Description

Type of Good(s)

Positive (Ei > 0)

Quantity Demanded of the product changes in same direction as change in income

Normal or superior

Negative (Ei < 0)

Quantity Demanded of the product changes in opposite direction as change in income

Inferior

Cross Price Elasticity (Exy) (QDNA -QDOA )/[(QDNA+QDOA)/2]

(PNB –POB) /[(PNB+POB)/2]

1. QD of good A falls from 100 to 90 as the price of good B rose from $10 to $20.

Calculate coefficient: ( 90 -100) /[(90 + 100) /2 ] = - 10 / 95 = - .105 = - .158

(20-10)/ [(20+10)/2] 10/ 15 .667

Cite Elasticity: inelastic

Type of good: complement

1. QD of good A rose from 300 to 400 as the price good K increased from $1 to $2.

Calculate coefficient:

Cite Elasticity:

Type of good:

1. QD for good J falls from 2000 to 1500 units as price of good K rose from $10 to $15.

Calculate coefficient:

Cite Elasticity:

Type of good:

1. QD for good X rose from 100 to 101 units as price of good Y increases from, $8 to $15.

Calculate coefficient:

Cite Elasticity:

Type of good:

Value of Coefficient

Description

Type of Good(s)

Positive (Ewzi > 0)

Quantity Demanded of W changes in same direction as change in price if Z

Substitute

Negative (Exy < 0)

Quantity Demanded of W changes in opposite direction as change in price if Z

Complement

Elasticity of Supply (Es) (QS(NEW) -QS(OLD)) /[(QS(NEW)+QS(OLD))/2]

Use same process as Price Ed (P(NEW) -P(OLD)) /[(P(NEW)+P(OLD))/2]

1. Price rose from $2 to $2.20 and QS increased from 100 to 130

Calculate coefficient:

Cite Elasticity: (E > 1 supply is Elastic. E < 1 Inelastic. E = 1Unit-elastic NO TR TEST ( PRICE & TR MOVE TOGETHER)