Question

please explain the following: a) briefly explain elasticity of demand and how it is measured b) Explain with diagrams and relevant examples, THREE (3) categories of price elasticity of demand. c) Explain any THREE (3) of price elasticity of demand.. please provide references

Answer 1

a. Elasticity of demand is the percentage change in quantity demanded caused by one percent change in the demand determinant under consideration, while other determinants are assumed to be constant.

Ed = % change in quantity demanded/ % change in demand determinant

•Symbolically, it may be written as:

Ed= ( ?Q/Q)/(?Z/Z )

where:

Ed refers to elasticity of demand

   ? refers to change

   Q refers to quantity demanded

   Z refers to a demand determinant

The larger the (absolute) value of this elasticity, the more responsive is quantity demanded to changes in the determinant under consideration.

b. Price elasticity of demand is the percentage change in quantity demanded caused by one percent change in price, while other determinants are assumed to be constant.

Ep= Percentage change in quantity demanded/Percentage change in price

Ep = - ( ?Q/Q)/(?P/P)

The coefficient of price elasticity of demand is always negative because price and demand move in opposite directions.

Types of Price elasticity of demand:

Unit elasticity of demand (?=1): when a given proportionate change in price causes an equally proportionate change in quantity demanded.

If John raises the price of a chocolate by $1.00, the unit elastic demand for that $1.00 increase would result in a decrease in the quantity demanded by one unit.

Relatively elastic demand (?>1): where a change in price cause a more than proportionate change in quantity demanded. Example: If the price of a packet of Lays chips increases by 2%, the quantity demanded decreses by 5%. This is an example of relatively elastic demand.

Relatively inelastic demand (?<1): where a change in price causes a less than proportionate change in quantity demanded.

Example: If the price of gasoline increases by 5%, then the quantity demanded decreases by 2%. This is an example of inelastic demand.