Elasticity Case

Demand Supply ELASTICITIES

Current dinner price = $100, q = 60 ;

New price = $80, q = 70

Price Elasticity of Demand:

∆Q/(Q0+Q1) = (70-60)/(70+60) = 10/130 = 1/13

∆P/(P0+P1) = (80-100)/(80+100) = (-20)/180 = (-1)/(9 )

PEoD = (%∆Q)/(%∆P) = 1/(13 ). (-9)/1 = 0.69

Price Elasticity of Demand here is 0.69 which is smaller than 1 so Demand is Price Inelastic.

When Demand is Price Inelastic, the change in price doesn't change much in demand or other way of saying, demand is not sensitive when price changes.

In this case, the decision of the restaurant to change prices is not a good one.

Current ticket p = $90, q = 2000;

New p = $50, q = 4000

Price Elasticity of Demand:

∆Q/(Q0+Q1) = (4000-2000)/(4000+2000) = 2000/6000 = 1/3

∆P/(P0+P1) = (50-90)/(50+90) = (-40)/140 = (-2)/(7 )

PEoD = (%∆Q)/(%∆P) = 1/(3 ). (-7)/2 = 1.17

Price Elasticity of Demand here is 1.17 which is greater than 1 so that Demand is Price Elastic. When Demand is Price Elastic, the change in price would make a (great) change in demand. The higher the price elasticity, the more sensitive consumers are to price changes. In this case, the decision of the restaurant to change prices was a good one.

Current monthly income = $10000, q = 6;

New income = $8000, q = 4

Income Elasticity of Demand:

∆Q/(Q0+Q1) = (4-6)/(4+6) = (-2)/10 = (-1)/5

∆I/(I0+I1) = (8000-10000)/(8000+10000) = (-2000)/18000 = (-1)/9

IEoD = (%∆Q)/(%∆I) = (-1)/5 . (-9)/1 = 1.8 >1

Income Elasticity of Demand shows us the sensitiveness of demand for a good when income changes. Here we can see that Income Elasticity of Demand is 1.8 which is greater than 1. We can conclude that Income Elastic and the good is a luxury good.

Current p of good y = $50, q of good x = 100;

New p of good y = $40, q of good x = 90

Cross Elasticity of Demand

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