Elasticity Demand | Price Elasticity Of Demand | Demand Elasticity

Elasticity DemandQues1 current market price, paid by consumers, for your widget is $8.00. The current market quantity is 10,000 units per month. You decide to raise the price of your widgets from $8.00 to $8.10. You expect (based on internal forecasts) that quantity will decrease from 10,000 to 8,000 units per month.

Elasticity Demand | Price Elasticity Of Demand | Demand ElasticityElasticity Demand  Elasticity of demand =  -(dq/dp)(p/q)

Change in quantity = Q1- Q0 =  8000 – 10,000= -2000

Change in price = P1- P0 = 8.10-8.00 = 0.1

P = original price

Q= Original Quantity

Now put the information in above formula:

-2000/0.1( 8/10,000) =  -16

1)Above result means that elasticity of demand in this case is 16

2) Percentage change in demand due to percentage change in price = 16

Total revenue in the original case when price change did not happen was

TR= Price x Quantity = 8 x10,000 = 80,000

New TR = New Price x New Quantity = 8.10 X8000 = 64800

Ques 2.

The current price, paid by businesses, for your widget is $3.00. The current quantity you sell to various businesses is 150,000 per month. You decide to cut the price of your widget from $3.00 to $2.70. You expect (based on internal forecasts) that the quantity you will be willing and able to provide to your customers will decrease from 150,000 to 138,750 per month.

Answer2.

Elasticity of  supply =  (dq/dp)(p/q)

Change in quantity = Q1- Q0 =  138750 – 150,000= -11250

Change in price = P1- P0 = 2.70 – 3 = 0.3

P = original price

Q= Original Quantity

Now put the information in above formula:

11250/0.3( 3/15,000) =  0.75

1)Above result means that elasticity of supply in this case is 0.75

2) Percentage change in supply due to percentage change in price = 0.75

3) Supply is inelastic

Total revenue in the original case when price change did not happen was

TR= Price x Quantity = 3 x150,000 = 450,000

New TR = New Price x New Quantity = 2.70 X137500 = 371250.  Total Revenue decreases in this case.

Elasticity Demand | Price Elasticity Of Demand | Demand Elasticity

Ques3.

The current market price, paid by consumers, for your widget is $8.00. The current market quantity is 10,000 units per month. Incomes have been rising in your city as a result of a significant increase in the number of high-end homes being built in your city. The average income in your city has risen from $75,000 per year to $87,000 per year. You expect (based on internal forecasts) that the demand for your widgets will increase from 10,000 per month to 10,800

Answer3.  Elasticity of demand =  (dq/dy)(y/q)

Change in quantity = Q1- Q0 =  10800 – 10,000= 800

Change in income = Y1- Y0 = 87000- 75000 = 13000

y = original price

q= Original Quantity

Now put the information in above formula:

800/13000( 75000/10,000) =  0.46

1)Above result means that elasticity of income in this case is 0.46

2) Percentage change in demand due to percentage change in income = 0.46

Total revenue in the original case when price change did not happen was

TR= Price x Quantity = 10,000 x75000 = 750000000

TR in new case

New TR = New Price x New Quantity = 10800 X87000 = 939600000

Total revenue will increase in this case. Elasticity of income is positive which shows it’s a normal good. But elasticity is less than 1 which means it’s a necessity good. As income rises demand for necessity good rises but less than the percentage rise in income

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