a) Define and calculate price elasticity of demand using the mid-point method. b) Discuss the determinants of price elasticity of demand and their impact on the degree of elasticity. c) Provide real-world examples illustrating the concept of price elasticity of demand.
a) Define and calculate price elasticity of demand using the mid-point method. b) Discuss the determinants of price elasticity of demand and their impact on the degree of elasticity. c) Provide real-world examples illustrating the concept of price elasticity of demand.
Chapter5: Elasticity Of Demand And Supply
Section: Chapter Questions
Problem 4.9P: (Other Elasticity Measures) Complete each of the following sentences: a. The income elasticity of...
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![# Elasticity of Demand
### a) Define and Calculate Price Elasticity of Demand Using the Mid-Point Method
Price elasticity of demand measures how much the quantity demanded of a good responds to changes in the price of that good. It’s calculated using the mid-point method, which is a more accurate way to calculate elasticity over a range of prices. The formula is:
\[ \text{Price Elasticity of Demand} = \frac{ \left( \frac{Q_2 - Q_1}{(Q_1 + Q_2)/2} \right) }{ \left( \frac{P_2 - P_1}{(P_1 + P_2)/2} \right) } \]
where \( Q_1 \) and \( Q_2 \) are the initial and final quantities demanded, and \( P_1 \) and \( P_2 \) are the initial and final prices.
### b) Discuss the Determinants of Price Elasticity of Demand and Their Impact on the Degree of Elasticity
Several factors influence the price elasticity of demand:
- **Availability of Substitutes**: The more substitutes available, the higher the elasticity, as consumers can easily switch to alternatives if the price of a good increases.
- **Necessity vs. Luxury**: Necessities tend to have inelastic demand, while luxuries are more elastic because consumers can forego luxuries more easily.
- **Proportion of Income**: If a good takes up a large portion of a consumer's income, the demand is likely to be more elastic.
- **Time Horizon**: Demand is more elastic over the long run because consumers have more time to adjust their behavior and find substitutes.
### c) Provide Real-World Examples Illustrating the Concept of Price Elasticity of Demand
- **Gasoline**: Generally inelastic because there are few immediate substitutes, and it is a necessity for many consumers.
- **Restaurant Meals**: More elastic since dining out is a luxury and there are many substitutes (e.g., cooking at home, different restaurants).
- **Prescription Medications**: Typically inelastic due to their necessity and lack of substitutes.
- **Smartphones**: Relatively elastic as there are many brands and models available, making it easier for consumers to switch if prices change.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F703b43e5-ae23-420c-b3a8-d626b9b6023e%2Fd13efd5e-e46c-4314-a2f5-5ebb723543be%2F3l6gag_processed.jpeg&w=3840&q=75)
Transcribed Image Text:# Elasticity of Demand
### a) Define and Calculate Price Elasticity of Demand Using the Mid-Point Method
Price elasticity of demand measures how much the quantity demanded of a good responds to changes in the price of that good. It’s calculated using the mid-point method, which is a more accurate way to calculate elasticity over a range of prices. The formula is:
\[ \text{Price Elasticity of Demand} = \frac{ \left( \frac{Q_2 - Q_1}{(Q_1 + Q_2)/2} \right) }{ \left( \frac{P_2 - P_1}{(P_1 + P_2)/2} \right) } \]
where \( Q_1 \) and \( Q_2 \) are the initial and final quantities demanded, and \( P_1 \) and \( P_2 \) are the initial and final prices.
### b) Discuss the Determinants of Price Elasticity of Demand and Their Impact on the Degree of Elasticity
Several factors influence the price elasticity of demand:
- **Availability of Substitutes**: The more substitutes available, the higher the elasticity, as consumers can easily switch to alternatives if the price of a good increases.
- **Necessity vs. Luxury**: Necessities tend to have inelastic demand, while luxuries are more elastic because consumers can forego luxuries more easily.
- **Proportion of Income**: If a good takes up a large portion of a consumer's income, the demand is likely to be more elastic.
- **Time Horizon**: Demand is more elastic over the long run because consumers have more time to adjust their behavior and find substitutes.
### c) Provide Real-World Examples Illustrating the Concept of Price Elasticity of Demand
- **Gasoline**: Generally inelastic because there are few immediate substitutes, and it is a necessity for many consumers.
- **Restaurant Meals**: More elastic since dining out is a luxury and there are many substitutes (e.g., cooking at home, different restaurants).
- **Prescription Medications**: Typically inelastic due to their necessity and lack of substitutes.
- **Smartphones**: Relatively elastic as there are many brands and models available, making it easier for consumers to switch if prices change.
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