Plot the
Reason behind the elasticity value getting smaller with the downward movement on demand curve.
Explanation of Solution
The required graph is below:
- The arc or mid- point elasticity is calculated as follows:
Elasticity of Demand (Ed)
Where Ed = coefficient of elasticity
P1 = Initial Price
P2 = New Price
Q1 = Initial Quantity
Q2 = New Quantity
At price $5 per unit, quantity demanded = 100 units
At price $10 per unit, quantity demanded = 80 units
Thus, at the first point where price = $5 per unit, quantity demanded = 100 units
P1= $10 P2 = $5
Q1 = 80 Q2 = 100
Price elasticity of demand = -0.33
At price $10 per unit, the quantity demanded is 80 units, elasticity of demand is calculated as follows:
P1= $10 P2 = $15
Q1 = 80 Q2 = 60
At price $10 per unit, price elasticity of demand is -0.71.
At price $15 per unit, quantity demanded is 60 units, elasticity is calculated as follows:
P1 = $15 P2= $20
Q1 = 60 Q2= 40
Thus, at price $15 per unit, price elasticity of demand is -1.4
At price $20 per unit, quantity demanded is 40 units, sp, elasticity is calculated as follows:
P1 = $25 P2= $25
Q1 = 40 Q2= 20
Thus, at price $20 per unit, price elasticity of demand is -3.
At price $25 per unit, quantity demanded is 20 units, so, elasticity is calculated as follows:
P1 = $25 P2= $30
Q1 = 20 Q2= 10
Thus, at price $25 per unit, price elasticity of demand is -3.67
b)
Using price changes of $10, we compare the price and quantity changes with $10 increments. We will still follow the same mid point formula.
At price $5 per unit, quantity demanded is 100 units and at price $15 per unit, the quantity demanded is 60 units, thus elasticity at $5 per unit is:
P1 = $5 P2= $15
Q1 = 100 Q2= 60
Thus, at price $5 with price changes of $10, price elasticity of demand is -0.5
At price $10 per unit, the quantity demanded is 80 units and at price $20 per unit, quantity demanded is 40 units, thus elasticity at $10 per unit is:
Thus, at price $10 with price changes of $10, price elasticity of demand is -1
At price $15 per unit, the quantity demanded is 60 units and at price $25 per unit, quantity demanded is 20 units, thus elasticity at $15 per unit is:
Thus, at price $15 with price changes of $10, price elasticity of demand is -2
At price $20 per unit, the quantity demanded is 40 units and at price $30 per unit, quantity demanded is 10 units, thus elasticity at $25 per unit is:
Price elasticity (Ed) is the ratio of percentage change in quantity demanded upon percentage change in price.
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