Question

Week 3: Supply and Demand: Price Elasticity

Problem #2

Due Date: Due by the end of Week 3 at 11:59 pm, ET.

Price plays a significant role in quantity demanded and quantity supplied. Consumers and sellers respond differently to changes in the price of different types of goods and the situation. To measure the responsiveness of consumers and sellers to changes in the price of a good, some rules of thumb are given. These rules of thumb are said to influence price elasticity of demand and supply making the curves to vary. The rules of thumb that affect price elasticity of demand are:

• Availability of a close substitute
• Necessities versus luxuries
• Definition of the market
• Time zone

For price elasticity of supply, they are:

• Flexibility of sellers to change in quantity of good produced
• Time period

Consequently, price elasticity can be unit, elastic, and inelastic demand and supply. In Problem #2, you will need to plot graphs in Excel to determine price elasticity of demand and supply showing the varying demand and supply curve.

View this video to complete the questions below: https://www.youtube.com/watch?v=MlEBmoPGJvo

Answer the questions below by using the following demand schedule:

Price	Quantity Demanded	Quantity Supplied
$13	585	1305
$12	635	1130
$11	665	980
$10	695	930
$9	705	840
$8	730	730
$7	750	630
$6	780	480
$5	830	360
$4	930	260

• Use the Excel template to calculate and plot the graph of the elasticity of demand between one point and the next. That is, plot A-to-B, B-to-C etc. Upon plotting the graph, determine the price elasticity of each value. For instance, it could be price elasticity, price inelastic, or unit elastic.
• Using the same Excel template, calculate the arc elasticity of supply between one point and the next. That is, plot A-to-B, B-to-C, etc. Upon plotting the graph, determine the price elasticity of each value. For instance, it could be price elasticity, price inelastic, or unit elastic.

Answer 1

Hi student,

I have answered your question. Please let me know in case of any query in the comments.

Problem #2 –

Price plays a significant role in quantity demanded and quantity supplied. Consumers and sellers respond differently to changes in the price of different types of goods and the situation. To measure the responsiveness of consumers and sellers to changes in the price of a good, some rules of thumb are given. These rules of thumb are said to influence price elasticity of demand and supply making the curves to vary. The rules of thumb that affect price elasticity of demand are:

Availability of a close substitute

Necessities versus luxuries

Definition of the market

Time zone

For price elasticity of supply, they are:

Flexibility of sellers to change in quantity of good produced

Time period

Consequently, price elasticity can be unit, elastic, and inelastic demand and supply.

Answer – I have graphed the demand and supply curves in Excel.

Next, I have calculated the price elasticity of demand between one point and the next for all the points (A-J) given in the question. I have used the mid-point method to calculate PED and I have mentioned the formula used in the column headers :

Point	Price	Quantity Demanded	Quantity Supplied	% change in price (=P2 - P1/(P1+P2)/2)	% change in quantity demanded (=Q2 - Q1/(Q1+Q2)/2)	Price elasticity of demand (=% change in quantity demanded/% change in price)	Type of Elasticity
A	13	585	1305	-	-	-	-
B	12	635	1130	-8%	8%	1.0	Unitary Elastic
C	11	665	980	-9%	5%	0.53	Inelastic
D	10	695	930	-10%	4%	0.46	Inelastic
E	9	705	840	-11%	1%	0.14	Inelastic
F	8	730	730	-12%	3%	0.30	Inelastic
G	7	750	630	-13%	3%	0.20	Inelastic
H	6	780	480	-15%	4%	0.25	Inelastic
I	5	830	360	-18%	6%	0.34	Inelastic
J	4	930	260	-22%	11%	0.51	Inelastic

Next, I have mentioned the type of elasticity.

When PED = 1, it is unitary elastic.

When PED > 1, price is demand elastic.

When PED < 1, price is demand inelastic.

Next, I have calculated the price elasticity of supply between one point and the next for all the points (A-J) given in the question, using arc elasticity formula. I have mentioned the formula used in the column headers :

Point	Price	Quantity Demanded	Quantity Supplied	% change in price (=P2 - P1/P1)	% change in quantity supplied (=Q2 - Q1/Q1)	Price elasticity of demand (=% change in quantity supplied/% change in price)	Type of Elasticity
A	13	585	1305	-	-	-	-
B	12	635	1130	-8%	-13%	1.74	Elastic
C	11	665	980	-8%	-13%	1.59	Elastic
D	10	695	930	-9%	-5%	0.56	Inelastic
E	9	705	840	-10%	-10%	0.97	Inelastic
F	8	730	730	-11%	-13%	1.18	Elastic
G	7	750	630	-13%	-14%	1.10	Elastic
H	6	780	480	-14%	-24%	1.67	Elastic
I	5	830	360	-17%	-25%	1.50	Elastic
J	4	930	260	-20%	-28%	1.39	Elastic

Again, I have mentioned the type of elasticity.

When PES = 1, it is unitary elastic.

When PES > 1, price is supply elastic.

When PES < 1, price is supply inelastic.

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