Explanation Given information: The statement “The elasticity of demand is given by E = | q p ⋅ d q d p | ”. The sensitivity of demand to changes in price varies with the product. For example, a change in the price of light bulbs may not affect the demand for light bulbs much, because people need light bulbs no matter what their price. However, a change in the price of a particular make of car may have a significant effect on the demand for that car, because people can switch to another make. Elasticity of Demand: We want to find a way to measure this sensitivity of demand to price changes. Our measure should work for products as diverse as light bulbs and cars. The prices of these two items are so different that it makes little sense to talk about absolute changes in price: Changing the price of light bulbs by $1 is a substantial change, whereas changing the price of a car by $1 is not. Instead, we use the percent change in price. How, for example, does a 1% increase in price affect the demand for the product? Let Δ p denotes the change in the price p of a product and Δ q denote the corresponding change in quantity q demanded. The percent change in price is Δ p p and the percent change in quantity demanded is Δ q q . We assume in this book that Δ p and Δ q have opposite signs (because increasing the price usually decreases the quantity demanded). Then the effect of a price change on demand is measured by the absolute value of the ratio

6th Edition

ISBN: 9781119399322

Author: Hughes-Hallett

Publisher: WILEY

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APPLIED CALCULUS (WILEY PLUS)

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Solution Summary: The author explains how the elasticity of demand is measured by the absolute value of the ratio.