Question

Calculate the own-wage elasticity of demand for each of the occupations a, b, and c as listed below. Let ED and
W represent the original employment levels and wage. ED’ and W’ represent the new employment levels and
wage. After calculating, state whether the labour demand for each occupation is elastic, inelastic, or unitary
elastic.
a. %ΔED = 10, %ΔW = -5
b. ED = 60, W = 8, ED’ = 50, W’ = 9
c. ED = 70, W = 7, ED’ = 90, W’ = 5

Answer 1

The own-wage elasticity of demand is given by:

e = % change in original employment level / % change in wages = (W/ED) * (ΔED/ΔW)

(a) e = %ΔED / %ΔW

e = 10/-5 = -2

|e| > 1, so it is elastic

(b) e = (W/ED) * (ΔED/ΔW)

where, W = (W+W')/2 = (8+9)/2 = 8.5

ED = (ED+ED')/2 = (60+50)/2 = 55

ΔW = W' - W = 9 - 8 = 1

ΔED = ED' - ED = 50 - 60 = -10

e = (8.5/55) * (-10/1) = -1.54

|e| > 1, so it is elastic

(c) e = (W/ED) * (ΔED/ΔW)

where, W = (W+W')/2 = (7+5)/2 = 6

ED = (ED+ED')/2 = (70+90)/2 = 80

ΔW = W' - W = 5 - 7 = -2

ΔED = ED' - ED = 90 - 70 = 20

e = (6/80) * (20/-2) = -0.75

|e| < 1, so it is inelastic