Calculating the Price Elasticity of Demand

The Price Elasticity of Demand (commonly known as just price elasticity) measures the rate of response of quantity demanded due to a price change. The formula for the Price Elasticity of Demand (PEoD) is: PEoD = (% Change in Quantity Demanded)/(% Change in Price) You may be asked the question "Given the following data, calculate the price elasticity of demand when the price changes from $9.00 to $10.00" Using the chart on the bottom of the page, I'll walk you through answering this question. (Your course may use the more complicated Arc Price Elasticity of Demand formula. If so you'll need to see the article on Arc Elasticity) First we'll need to find the data we need. We know that the original price is $9 and the new price is $10, so we have Price(OLD)=$9 and Price(NEW)=$10. From the chart we see that the quantity demanded when the price is $9 is 150 and when the price is $10 is 110. Since we're going from $9 to $10, we have QDemand(OLD)=150 and QDemand(NEW)=110, where "QDemand" is short for "Quantity Demanded". So we have: Price(OLD)=9 Price(NEW)=10 QDemand(OLD)=150 QDemand(NEW)=110 To calculate the price elasticity, we need to know what the percentage change in quantity demand is and what the percentage change in price is. It's best to calculate these one at a time.

Calculating the Percentage Change in Quantity Demanded

The formula used to calculate the percentage change in quantity demanded is: [QDemand(NEW) - QDemand(OLD)] / QDemand(OLD) By filling in the values we wrote down, we get: [110 - 150] / 150 = (-40/150) = -0.2667 We note that % Change in Quantity Demanded = -0.2667 (We leave this in decimal terms. In percentage terms this would be -26.67%). Now we need to calculate the percentage change in price.

Calculating the Percentage Change in Price

Similar to before, the formula used to calculate the percentage change in price is:

[Price(NEW) - Price(OLD)] / Price(OLD) By filling in the values we wrote down, we get: [10 - 9] / 9 = (1/9) = 0.1111 We have both the percentage change in quantity demand and the percentage change in price, so we can calculate the price elasticity of demand.

Final Step of Calculating the Price Elasticity of Demand

We go back to our formula of: PEoD = (% Change in Quantity Demanded)/(% Change in Price) We can now fill in the two percentages in this equation using the figures we calculated earlier. PEoD = (-0.2667)/(0.1111) = -2.4005 When we analyze price elasticities we're concerned with their absolute value, so we ignore the negative value. We conclude that the price elasticity of demand when the price increases from $9 to $10 is 2.4005.

How Do We Interpret the Price Elasticity of Demand?

A good economist is not just interested in calculating numbers. The number is a means to an end; in the case of price elasticity of demand it is used to see how sensitive the demand for a good is to a price change. The higher the price elasticity, the more sensitive consumers are to price changes. A very high price elasticity suggests that when the price of a good goes up, consumers will buy a great deal less of it and when the price of that good goes down, consumers will buy a great deal more. A very low price elasticity implies just the opposite, that changes in price have little influence on demand. Often an assignment or a test will ask you a follow up question such as "Is the good price elastic or inelastic between $9 and $10". To answer that question, you use the following rule of thumb:

If PEoD > 1 then Demand is Price Elastic (Demand is sensitive to price changes) If PEoD = 1 then Demand is Unit Elastic If PEoD < 1 then Demand is Price Inelastic (Demand is not sensitive to price changes)

Recall that we always ignore the negative sign when analyzing price elasticity, so PEoD is always positive. In the case of our good, we calculated the price elasticity of demand to be 2.4005, so our good is price elastic and thus demand is very sensitive to price changes.

Data
Price $7 $8 $9 $10 $11 Quantity Demanded 200 180 150 110 60 Quantity Supplied 50 90 150 210 250

Income Elasticity of Demand

The Income Elasticity of Demand measures the rate of response of quantity demand due to a raise (or lowering) in a consumers income. The formula for the Income Elasticity of Demand (IEoD) is given by: IEoD = (% Change in Quantity Demanded)/(% Change in Income)

Calculating the Income Elasticity of Demand

On an assignment or a test, you might be asked "Given the following data, calculate the income elasticity of demand when a consumer's income changes from $40,000 to $50,000". (Your course may use the more complicated Arc Income Elasticity of Demand formula. If so you'll need to see the article on Arc Elasticity)Using the chart on the bottom of the page, I'll walk you through answering this question. The first thing we'll do is find the data we need. We know that the original income is $40,000 and the new price is $50,000 so we have Income(OLD)=$40,000 and Income(NEW)=$50,000. From the chart we see that the quantity demanded when income is $40,000 is 150 and when the price is $50,000 is 180. Since we're going from $40,000 to $50,000 we have QDemand(OLD)=150 and QDemand(NEW)=180, where "QDemand" is short for "Quantity Demanded". So you should have these four figures written down: Income(OLD)=40,000 Income(NEW)=50,000 QDemand(OLD)=150 QDemand(NEW)=180 To calculate the price elasticity, we need to know what the percentage change in quantity demand is and what the percentage change in price is. It's best to calculate these one at a time.

Calculating the Percentage Change in Quantity Demanded

The formula used to calculate the percentage change in quantity demanded is: [QDemand(NEW) - QDemand(OLD)] / QDemand(OLD)

By filling in the values we wrote down, we get: [180 - 150] / 150 = (30/150) = 0.2 So we note that % Change in Quantity Demanded = 0.2 (We leave this in decimal terms. In percentage terms this would be 20%) and we save this figure for later. Now we need to calculate the percentage change in price.

Calculating the Percentage Change in Income

Similar to before, the formula used to calculate the percentage change in income is: [Income(NEW) - Income(OLD)] / Income(OLD) By filling in the values we wrote down, we get: [50,000 - 40,000] / 40,000 = (10,000/40,000) = 0.25 We have both the percentage change in quantity demand and the percentage change in income, so we can calculate the income elasticity of demand.

Final Step of Calculating the Income Elasticity of Demand

We go back to our formula of: IEoD = (% Change in Quantity Demanded)/(% Change in Income) We can now fill in the two percentages in this equation using the figures we calculated earlier. IEoD = (0.20)/(0.25) = 0.8 Unlike price elasticities, we do care about negative values, so do not drop the negative sign if you get one. Here we have a positive price elasticity, and we conclude that the income elasticity of demand when income increases from $40,000 to $50,000 is 0.8.

How Do We Interpret the Income Elasticity of Demand?

Income elasticity of demand is used to see how sensitive the demand for a good is to an income change. The higher the income elasticity, the more sensitive demand for a good is to income changes. A very high income elasticity suggests that when a consumer's income goes up, consumers will buy a great deal more of that good. A very low price elasticity implies just the opposite, that changes in a consumer's income has little influence on demand.

Often an assignment or a test will ask you the follow up question "Is the good a luxury good, a normal good, or an inferior good between the income range of $40,000 and $50,000?" To answer that use the following rule of thumb:

If IEoD > 1 then the good is a Luxury Good and Income Elastic If IEoD < 1 and IEOD > 0 then the good is a Normal Good and Income Inelastic If IEoD < 0 then the good is an Inferior Good and Negative Income Inelastic

In our case, we calculated the income elasticity of demand to be 0.8 so our good is income inelastic and a normal good and thus demand is not very sensitive to income changes.

Data
Income $20,000 $30,000 $40,000 $50,000 $60,000 Quantity Demanded 60 110 150 180 200

Cross-Price Elasticity of Demand

The Cross-Price Elasticity of Demand measures the rate of response of quantity demanded of one good, due to a price change of another good. If two goods are substitutes, we should expect to see consumers purchase more of one good when the price of its substitute increases. Similarly if the two goods are complements, we should see a price rise in one good cause the demand for both goods to fall. Your course may use the more complicated Arc Cross-Price Elasticity of Demand formula. If so you'll need to see the article on Arc Elasticity. The common formula for the Cross-Price Elasticity of Demand (CPEoD) is given by: CPEoD = (% Change in Quantity Demand for Good X)/(% Change in Price for Good Y)

Calculating the Cross-Price Elasticity of Demand

You're given the question: "With the following data, calculate the cross-price elasticity of demand for good X when the price of good Y changes from $9.00 to $10.00." Using the chart on the bottom of the page, we'll answer this question. We know that the original price of Y is $9 and the new price of Y is $10, so we have Price(OLD)=$9 and Price(NEW)=$10. From the chart we see that the quantity demanded of X when the price of Y is $9 is 150 and when the price is $10 is 190. Since we're going from $9 to $10, we have QDemand(OLD)=150 and QDemand(NEW)=190. You should have these four figures written down:

Price(OLD)=9 Price(NEW)=10 QDemand(OLD)=150 QDemand(NEW)=190 To calculate the cross-price elasticity, we need to calculate the percentage change in quantity demanded and the percentage change in price. We'll calculate these one at a time.

Calculating the Percentage Change in Quantity Demanded of Good X

The formula used to calculate the percentage change in quantity demanded is: [QDemand(NEW) - QDemand(OLD)] / QDemand(OLD) By filling in the values we wrote down, we get: [190 - 150] / 150 = (40/150) = 0.2667 So we note that % Change in Quantity Demanded = 0.2667 (This in decimal terms. In percentage terms this would be 26.67%).

Calculating the Percentage Change in Price of Good Y

The formula used to calculate the percentage change in price is: [Price(NEW) - Price(OLD)] / Price(OLD) We fill in the values and get: [10 - 9] / 9 = (1/9) = 0.1111 We have our percentage changes, so we can complete the final step of calculating the cross-price elasticity of demand.

Final Step of Calculating the Cross-Price Elasticity of Demand

We go back to our formula of: CPEoD = (% Change in Quantity Demanded of Good X)/(% Change in Price of Good Y) We can now get this value by using the figures we calculated earlier. CPEoD = (0.2667)/(0.1111) = 2.4005

We conclude that the cross-price elasticity of demand for X when the price of Y increases from $9 to $10 is 2.4005.

How Do We Interpret the Cross-Price Elasticity of Demand?

The cross-price elasticity of demand is used to see how sensitive the demand for a good is to a price change of another good. A high positive cross-price elasticity tells us that if the price of one good goes up, the demand for the other good goes up as well. A negative tells us just the opposite, that an increase in the price of one good causes a drop in the demand for the other good. A small value (either negative or positive) tells us that there is little relation between the two goods. Often an assignment or a test will ask you a follow up question such as "Are the two goods complements or substitutes?". To answer that question, you use the following rule of thumb:

If CPEoD > 0 then the two goods are substitutes If CPEoD =0 then the two goods are independent (no relationship between the two goods If CPEoD < 0 then the two goods are complements

In the case of our good, we calculated the cross-price elasticity of demand to be 2.4005, so our two goods are substitutes when the price of good Y is between $9 and $10.

Using Calculus To Calculate Price Elasticity of Demand

Suppose you're given the following question: Demand is Q = 110 - 4P. What is price (point) elasticity at $5? We saw that we can calculate any elasticity by the formula: Elasticity of Z with respect to Y = (dZ / dY)*(Y/Z) In the case of price elasticity of demand, we are interested in the elasticity of quantity demand with respect to price. Thus we can use the following equation: Price elasticity of demand: = (dQ / dP)*(P/Q) In order to use this equation, we must have quantity alone on the left-hand side, and the right-hand side be some function of price. That is the case in our demand equation of Q = 110 - 4P. Thus we differentiate with respect to P and get: dQ/dP = -4 So we substitute dQ/dP = -4 and Q = 110 - 4P into our price elasticity of demand equation: Price elasticity of demand: = (dQ / dP)*(P/Q) Price elasticity of demand: = (-4)*(P/(110-4P) Price elasticity of demand: = -4P/(110-4P) We're interested in finding what the price elasticity is at P = 5, so we substitute this into our price elasticity of demand equation:

Price elasticity of demand: = -4P/(110-4P) Price elasticity of demand: = -20/90 Price elasticity of demand: = -2/9 Thus our price elasticity of demand is -2/9. Since it is less than 1 in absolute terms, we say that Demand is Price Inelastic

Using Calculus To Calculate Income Elasticity of Demand

Suppose you're given the following question: Demand is Q = -110P +0.32I, where P is the price of the good and I is the consumers income. What is the income elasticity of demand when income is 20,000 and price is $5? We saw that we can calculate any elasticity by the formula: Elasticity of Z with respect to Y = (dZ / dY)*(Y/Z) In the case of income elasticity of demand, we are interested in the elasticity of quantity demand with respect to income. Thus we can use the following equation: Price elasticity of income: = (dQ / dI)*(I/Q) In order to use this equation, we must have quantity alone on the left-hand side, and the right-hand side be some function of income. That is the case in our demand equation of Q = -110P +0.32I. Thus we differentiate with respect to I and get: dQ/dI = 0.32 So we substitute dQ/dP = -4 and Q = -110P +0.32I into our price elasticity of income equation: Income elasticity of demand: = (dQ / dI)*(I/Q) Income elasticity of demand: = (0.32)*(I/(-110P +0.32I)) Income elasticity of demand: = 0.32I/(-110P +0.32I) We're interested in finding what the income elasticity is at P = 5 and I = 20,000, so we substitute this into our income elasticity of demand equation: Income elasticity of demand: = 0.32I/(-110P +0.32I) Income elasticity of demand: = 6400/(-550 + 6400) Income elasticity of demand: = 6400/5850 Income elasticity of demand: = 1.094 Thus our income elasticity of demand is 1.094. Since it is greater than 1 in absolute terms, we say that Demand is Income Elastic, which also means that our good is a luxury good.

Using Calculus To Calculate Cross-Price Elasticity of Demand

Suppose you're given the following question: Demand is Q = 3000 - 4P + 5ln(P') , where P is the price for good Q, and P' is the price of the competitors good. What is the cross-price elasticity of demand when our price is $5 and our competitor is charging $10?

We saw that we can calculate any elasticity by the formula: Elasticity of Z with respect to Y = (dZ / dY)*(Y/Z) In the case of cross-price elasticity of demand, we are interested in the elasticity of quantity demand with respect to the other firm's price P'. Thus we can use the following equation: Cross-price elasticity of demand = (dQ / dP')*(P'/Q) In order to use this equation, we must have quantity alone on the left-hand side, and the right-hand side be some function of the other firms price. That is the case in our demand equation of Q = 3000 - 4P + 5ln(P'). Thus we differentiate with respect to P' and get: dQ/dP' = 5/P' So we substitute dQ/dP' = 5/P' and Q = 3000 - 4P + 5ln(P') into our cross-price elasticity of demand equation: Cross-price elasticity of demand = (dQ / dP')*(P'/Q) Cross-price elasticity of demand = (5/P')*(P'/(3000 -4P + 5ln(P'))) We're interested in finding what the cross-price elasticity of demand is at P = 5 and P' = 10, so we substitute these into our cross-price elasticity of demand equation: Cross-price elasticity of demand = (5/P')*(P'/(3000 -4P + 5ln(P'))) Cross-price elasticity of demand = (5/10)*(5/(3000 - 20 + 5ln(10))) Cross-price elasticity of demand = 0.5 * (5 / 3000 - 20 + 11.51) Cross-price elasticity of demand: = 0.5 * (5 / 2991.51) Cross-price elasticity of demand: = 0.5 * 0.00167 Cross-price elasticity of demand: = 0.5 * 0.000835 Thus our cross-price elasticity of demand is 0.000835. Since it is greater than 0, we say that goods are substitutes.

Instructions
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1. 1 Take a typical demand curve and select two points on it. For example, Point A has a price of $15 and a quantity demanded of 15. Point B has a price of $10 and a quantity demanded of 18.

Calculate the percentage change in quantity. With two points on the demand curve, take the change in quantity and then divide it by the beginning quantity. Take ( Q2 - Q1 ) / Q1. In the example, Q2 = 18 and Q1 = 15. So the difference between them is 3. Dividing this by 15 gives you a 20 percent. In other words, quantity demanded increased by 20 percent.
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3 Calculate the percentage change in price. Take the difference between the two prices and divide it by the beginning price. The formula is ( P2 - P1 ) / P1. Referring back to the example, P2 = $10 and P1 = $15. So the difference between them is $5. Dividing this by 15 gives you a -33 percent. In other words, price decreased by 33 percent.

4 Divide the percentage change in quantity by the percentage change in price. This gives you the price elasticity of demand. In the example, divide the 20 percent increase in quantity by the 33 percent decrease in price.That gives you a price elasticity of demand of -60 percent or -0.60.

How do i calculate price elasticity of demand?

demand for a product was 2000 @ $400 each. an increase in price result in the demand for the product at 1000 @ $500 each. what is the price elasticity of demand? Middle point for price = (400+500)/2 = 900/2 = 450 Change in price = 500-400 = +100 Change in price % = 100/450=2/9 22.2% Middle point for quantity = (2000+1000)/2 = 1500 Change in quantity = 1000-2000 = -1000 Change in quantity % = -1000/1500 = 2/3 66.7% E=Q % / P % = 66.7/22.2 = (2/3) / (2/9) = 3 Price elasticity of demand is 3 (elastic).

Calculating price elasticity of demand? Help please!!?

Hello, I'm being asked to calculate the price elasticity of demand for this problem, but I'm not sure how to do it because there is only an equation and no numbers. Anyway, any help would be wonderful! Thank you. Suppose that the total market demand for compact disc players is D(p)=300-15p. Calculate the price elasticity of demand for this good.

Answer
Price elasticity refers to the responsiveness of consumer over to a change in price of goods/services. now, lets focus to your problem.. Lets say QD = 300-15p. we can't measure the elasticity for compact disc because you didn't give other data showing that there is a changes in price. Anyway, I can help you by giving assumption to the price of this product using the same demand equation (QD=300-15p) LEt say at original price is at $10 and second price is $15 1st step, find the qty demanded using our equation Qd=300-15p Qd1= 300-15p = 300-15(10) = 300-150 Qd1= 150 Qd2= 300-15p = 300-15(15) =300-225 Qd2= 75 Now after getting the quantity demanded find the price elasticity; Price elasticity = % change in qty. demaded / % change in Price Ep= q2-q1/q1 * p1/p2-p1 Ep= 75-150/150 * 10/15-10 = (-0.5) * 2

= -1 = /-1/ =1 Price Elasticity is 1 therefore it is UNITARY ELASTIC. This means that using the data given, The % change in Price results to an equal % change in teh quantity demanded for compact disc.

Calculating cross price elasticity of demand...?

Suppose grocery stores in Seattle reduced the price of reusable cloth bags by 50 percent after the imposition of the green fee, causing the demand for disposable bags to decrease from 200 million per year to 150 million per year. The cross price elasticity of demand between cloth and disposable bags is _____

Best Answer - Chosen by Voters

The cross price elasticity of demand is equal to the percentage change in the quantity of one good divided by the percentage change in the price of the other good. The percentage change in the quantity of disposable bags is -50 million / 200 million, or -25% The percentage change in the price of cloth bags is given, at -50% The cross price elasticity of demand, then, is -25/-50, or +0.5. I left the minus signs, to denote decrease, in the calculations in order to show that the final answer is a positive number. This is important to cross price elasticity, since cross price elasticity measures how two goods are related to each other. Since the answer is a positive number, the quantity demanded of one good moves in the same direction as the price of the other good: they are substitutes. If the final answer was a negative number, they would be complements. Since the answer, +0.5, is less than 1, the cross price elasticity of demand is relatively inelastic, meaning that althought they are substitutes, they are not really close substitutes. another answer The quantity decrease=(200-150)/200 x 100=-25% Cross price elasticity= -25/-50=0.5,inelastic.The two goods are substitute

What is the firms output elasticity and returns to scale?

UWIDEC production function is lnQ = 4.73 + 0.29lnK + 0.68lnL

a) Convert the production function into its normal form. b) What is the firms output elasticity and returns to scale? Explain. a) Q = e^4.73 x K^0.29 x L^0.68. This is a Cobb-Douglas Production Function. b) Output elasticity of capital is 0.29, while output elasticity of labor is 0.68. 0.29 + 0.68 = 0.97 which is less than one. So the firm is experiencing decreasing returns to scale.