Question

what is the definition of elasticity of demand?

formula?

each of the following cases, indicate which could you think has a relatively more price elastic demand and identify the reason (more substitutes bigger share of the budget or more times to adjust)

:motorcycles or Harley Davidsons

:peanut butter or housing

:your electric bill this month or over the entire year

If TAXI fares rise what will happen to the total revenue received by taxi operators assuming that the elasticity of demand for TAXI fares is elastic?

Answer 1

Elasticity of demand is the responsiveness of the consumer demand with respect to the change in price of the product. This provides the degree to which demand respond to price changes. This can be measured through point elasticity formula which gives elasticity as (dQ/Q)/(dP/P) where dQ is change in quantity demanded,Q original quantity,dP change in Price,P original price or arc elasticity as (((P1+P2)/2)/((Q1+Q2)/2))*(dQ/dP)

Between normal Motorcycle and Harley Davidson since Harley Davidson is more costly and constitute major share of the budget ahence will have higher elasticity

Between Peanut Butter and Housing ,Housing will have higher elasticity since they are a large item purchase and require major spend

Between electricity bill for the month and entire year since entire year has more time to adjust it will have larger impact in long run and hence price elasticity will be larger for the entire year

Since elasticity of demand for Taxi is elastic that means greater than one and the impact of change in quantity demanded will supersede the impact of price change on revenue hence Revenue will decrease, or in other words revenue decrease because of demand decrease will be higher than revenue Increase on account of price increase