Assignment

Elasticity of demand:  synonyms for elasticity are flexibility, adjustability, and sensitivity.

How flexible is your demand for a product, if the price rises or falls.  If the price rises, are you likely to buy much less?  If so, then you are sensitive to price, so your demand is elastic, i.e., you will buy much less as price rises.  This is normally true for things that you can live without.

If a price rise will not change the quantity you demand much, then you are not very affected by a price rise, and your demand is inelastic, i.e., you will probably buy about the same amount, even if the price has risen.

So, does the quantity demanded increase or decrease dramatically with price?  Is your price elasticity of demand (PED) elastic or inelastic?

In the following questions, you are asked to make calculations using the midpoint method.  If you do not use the midpoint method, your answers will be incorrect.  The video does a good job of explaining this method.  Be sure to watch it.

1.

Given the following:

Price is measured in dollars and quantity is measured in units.

P₁ = 19

P₂ = 14

Q₁ = 10

Q₂ = 29

a. Using the midpoint method, calculate the PED for a price decrease from P₁ to P_2.

b. What revenue is produced at price P₁?

c. What revenue is produced at price P₂?

d. Is the demand curve elastic or inelastic?

e. So, you can conclude that with this degree of demand elasticity (elastic or inelastic), a small decrease in price can produce more/less (choose one) revenue?

2.

Given the following:

Price is measured in dollars and quantity is measured in units.

P₁ = 10

P₂ = 23

Q₁ = 12

Q₂ = 9

a. Using the midpoint method, calculate the PED for a price increase from P₁ to P_2.

b. What revenue is produced at price P₁?

c. What revenue is produced at price P₂?

d. Is the demand curve elastic or inelastic?

e. So, you can conclude that with this degree of demand elasticity (elastic or inelastic), a relatively small price increase can produce more/less (choose one) revenue?

3. Explain how the following demand curve can be elastic from its initial intersection with the Y axis to its midpoint, where it is unit elastic, and then explain how it can be inelastic to its intersection with the X axis.

4.

a. Give two examples of a good or service with a highly inelastic demand. Why is the demand highly inelastic? Two answers are required.

b. Give two examples of a good or service with a highly inelastic supply. Why is the supply highly inelastic?  Two answers are required.