# Elasticity of Demand### a) Define and Calculate Price Elasticity of Demand Using the Mid-Point MethodPrice 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 ElasticitySeveral 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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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.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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