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    EAB Numerical Elasticity of Demand

    Uploaded by

    Reeha Neupane
    This document provides examples and solutions for calculating different types of elasticity of demand, including: 1) Price elasticity of demand is calculated using the percentage change in quantity demanded over the percentage change in price. An example shows price elasticity is relatively elastic. 2) Cross price elasticity measures the responsiveness of the demand for one good to a change in price of another. An example shows cars are substitutes as their cross price elasticity is positive. 3) Income elasticity is calculated using the percentage change in quantity demanded over the percentage change in income. An example shows income elasticity is positive but less than one, indicating the good is a necessity.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    EAB Numerical Elasticity of Demand

    Uploaded by

    Reeha Neupane
    72 views10 pages
    This document provides examples and solutions for calculating different types of elasticity of demand, including: 1) Price elasticity of demand is calculated using the percentage change in quantity demanded over the percentage change in price. An example shows price elasticity is relatively elastic. 2) Cross price elasticity measures the responsiveness of the demand for one good to a change in price of another. An example shows cars are substitutes as their cross price elasticity is positive. 3) Income elasticity is calculated using the percentage change in quantity demanded over the percentage change in income. An example shows income elasticity is positive but less than one, indicating the good is a necessity.

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    This document provides examples and solutions for calculating different types of elasticity of demand, including: 1) Price elasticity of demand is calculated using the percentage change in quantity demanded over the percentage change in price. An example shows price elasticity is relatively elastic. 2) Cross price elasticity measures the responsiveness of the demand for one good to a change in price of another. An example shows cars are substitutes as their cross price elasticity is positive. 3) Income elasticity is calculated using the percentage change in quantity demanded over the percentage change in income. An example shows income elasticity is positive but less than one, indicating the good is a necessity.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    72 views10 pages

    EAB Numerical Elasticity of Demand

    Uploaded by

    Reeha Neupane
    This document provides examples and solutions for calculating different types of elasticity of demand, including: 1) Price elasticity of demand is calculated using the percentage change in quantity demanded over the percentage change in price. An example shows price elasticity is relatively elastic. 2) Cross price elasticity measures the responsiveness of the demand for one good to a change in price of another. An example shows cars are substitutes as their cross price elasticity is positive. 3) Income elasticity is calculated using the percentage change in quantity demanded over the percentage change in income. An example shows income elasticity is positive but less than one, indicating the good is a necessity.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 10

    Classroom Supplement: Elasticity of Demand

    Example One: Price Elasticity of Demand

    Suppose the price of a Basmati rice increases from Rs. 4500 to Rs. 5000 per Quintal and
    the quantity demanded decreases from 150 to 100 Quintal, calculate price elasticity.

    Solution

    Here,

    Initial Price or Original Price

    Initial Quantity Demand or Original Quantity Demand

    Final Price

    Final Quantity Demand

    Change in Price

    Or,

    Again, Change in Quantity Demand

    Or,

    We Know

    Price Elasticity of Demand

    Or,

    Or,

    Or,

    Or,

    i.e. Price elasticity of demand is relatively elastic.

    Alternative Method

    We have,

    1
    Classroom Supplement: Elasticity of Demand

    Initial Price or Original Price

    Initial Quantity Demand or Original Quantity Demand

    Final Price

    Final Quantity Demand

    The mid-point method (average method or arc method) of measurement of price


    elasticity of demand is given by,

    Price Elasticity of Demand

    Or,

    Or,

    Or,

    Or,

    i.e. Price elasticity of demand is relatively elastic.

    Example Two: Price Elasticity of Demand

    The demand for a product is given by and the product initially priced

    Rs 400 per unit, calculate Price Elasticity of demand.

    If the seller wanted to increase revenue, what strategy seller has to adopt? Why?

    Solution

    We have,

    And

    Substituting value of P in demand equation,

    2
    Classroom Supplement: Elasticity of Demand

    We get,

    Or,

    Now the price elasticity of demand is

    Here,

    Differentiating demand function with respect to price

    We get,

    Or,

    Or

    Or,

    Or,

    Or,

    Or,

    i.e. Price elasticity of demand is relatively inelastic.

    As the elasticity of demand is less than one increase in price increases total revenue and
    vice versa. Hence seller has to increase price so as to increase revenue from sale of the
    product.

    Example Three: Cross (or Cross Price) Elasticity of Demand

    Suppose the annual demand function for the Honda Accord is


    Where, are the prices of the Honda Accord and the Toyota
    Camry respectively (in thousands), and PG is the price of gasoline (per gallon). What is
    the elasticity of demand of the Accord with respect to the price of Camry when both
    cars sell for $20,000 and fuel cost $3 per gallon? What is the elasticity with respect to
    the price of gasoline?

    3
    Classroom Supplement: Elasticity of Demand

    Solution

    We have,

    Demand for Honda Accord

    Price of Honda Accord

    Price of Toyota Camry

    Price of Gasoline

    Substituting Value of in the demand function

    We get,

    Or,

    i.e. Demand for Honda Accord is 400 Thousands.

    Cross Price Elasticity between Honda Accord and Toyota Camry

    We have,

    Or,

    Price of Honda Accord

    Price of Toyota Camry

    Now Cross Price Elasticity of Demand

    Here,

    Differentiating demand function QA with respect to price of Camry (PC)

    We get,

    Or,

    4
    Classroom Supplement: Elasticity of Demand

    We know,

    Or,

    Or,

    Or,

    Here, cross elasticity of demand between Honda Accord and Toyota Camry is positive.
    The positive cross price elasticity of demand indicates that two vehicle are substitute
    goods.

    Cross Price Elasticity between Honda Accord and Gasoline

    We have,

    Or,

    Price of Honda Accord

    Price of Gasoline

    Now Cross Price Elasticity of Demand

    Here,

    Differentiating demand function QA with respect to price of Gasoline (PG)

    We get,

    Or,

    We know,

    Or,

    Or,

    Or,
    5
    Classroom Supplement: Elasticity of Demand

    Here, cross elasticity of demand between Honda Accord and Gasoline is negative. The
    negative cross price elasticity of demand indicates that two goods are complementary
    to each other.

    Example Four: Price, Income and Cross Elasticity of Demand

    Given the demand for a Product A, Where PA and PB are


    the price per unit of A and B commodity and are Rs 200 and Rs 100 respectively.
    Calculate price, income and cross elasticity of demand for Income (Y) Rs 10,000? What is
    income elasticity of demand when income increases to Rs 15,000?

    Solution

    Price Elasticity of Demand

    We have demand for product A is

    Income

    Price of A

    Price of B

    Substituting values of price of A, price of B and income of the consumer in Demand


    function

    We get

    Or,

    The Price elasticity of demand is given by

    Here,

    Differentiating demand function with respect to Price of A(P A)

    We get,

    Or,

    6
    Classroom Supplement: Elasticity of Demand

    Or,

    Or,

    Or,

    Or,

    Or,

    i.e. Demand is relatively inelastic.

    Cross (or Cross Price) Elasticity of Demand

    We have

    Income

    Price of A

    Price of B

    Substituting values of price of A, price of B and income of the consumer in Demand


    function

    We get

    Or,

    The Cross Price elasticity of demand is given by

    Here,

    Differentiating demand function with respect to Price of B (PB)

    We get,

    Or,

    7
    Classroom Supplement: Elasticity of Demand

    Or,

    Or,

    Or,

    Or,

    i.e. Cross elasticity of demand is positive. Positive cross price elasticity of demand
    indicates that Goods A and B are substitute (competitive) to each other.

    Income Elasticity of Demand

    We have

    Income

    Price of A

    Price of B

    Substituting values of price of A, price of B and income of the consumer in Demand


    function

    We get

    Or,

    The income elasticity of demand is given by

    Here,

    Differentiating demand function with respect to income (Y)

    We get,

    Or,

    Or,

    8
    Classroom Supplement: Elasticity of Demand

    Or,

    Or, 0.5

    Or,

    Or,

    i.e. Income elasticity of demand is positive and less than one. Hence the commodity is
    normal good necessary item.

    Income Elasticity of Demand when Income Increases

    The initial income of consumer is Rs 10000

    Demand

    Or,

    Or,

    Hence,

    The initial income (Y1) = 10000

    Initial Demand (Q1) = 8000

    As the income increases, the final income of the consumer is Rs 15000

    Or,

    Now,

    Or,

    Now,

    Final Income (y2) = 15000

    Final Demand (Q2) = 10000

    9
    Classroom Supplement: Elasticity of Demand

    The mid-point method (average method or arc method) of measurement of income


    elasticity of demand is given by,

    Income Elasticity of Demand

    Or,

    Or,

    Or,

    Or,

    i.e. Income elasticity of demand is positive and less than one. Hence the commodity is
    normal good necessary item.

    10

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