Price elasticity of demand measures the responsiveness of quantity demanded of a product to a change...

Price elasticity of demand measures the responsiveness of quantity demanded of a product to a change in the price of that product.
1. State the (midpoint) formula for calculating the price elasticity of demand.
2. Describe elastic demand.
3. Describe inelastic demand.
4. Describe unit elastic demand
5. Explain when demand would be perfectly elastic.
6. Explain when demand would be perfectly inelastic.
7. Explain how the price elasticity of demand affects the relationship between price and total revenue.

Solutions

Expert Solution

a) According to the midpoint method, the price elasticity of demand is computed by dividing the percentage change in quantity with the percentage change in price.

b) When a small change in price brings about more than proportionate change in demand, it is known as the elastic demand.

c) When a higher change in price brings about lesser than proportionate change in demand, it is known as inelastic demand.

d) When the change in quantity demanded is exactly equal to the change in price, it is known as unitary elastic demand

e) Elastic demand is when a small change in the price of the good will bring a large change in the quantity demanded. If the curve is perfectly flat (horizontal), then we call this to be a perfectly elastic.

f) Perfectly inelastic is when there is no change in demand with change in price, and E_d = 0 and the demand curve would be a vertical straight line parallel to Y- axis

g) Price elasticity of demand tells how changes in the good's price and the demand for those same goods are related. When these two variables interact it affects on a firm's total revenue.

Rahul Sunny answered 7 months ago

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