MicroEcon

Problem Set 3 Name____________________

Worksheet on Elasticity

Step 1 - E L A S T I C or INELASTIC?

Price Elasticity of Demand is a measure of how responsive demand is to a change in price. If a price change leads to a considerably

bigger change in quantity demanded, we would consider the good to be responsive to a price change—hence elastic. If, however, a

similar price change leads to a much smaller change in demand, we would consider it inelastic.

To get a more precise measure of the responsiveness to a price change we can calculate a value for price elasticity of demand. We

use the formula:

PRICE ELASTICITY OF DEMAND = % change in Q demand

% change in price

PERCENTAGE CHANGE= new number-old number X 100

average

Use the formula above to calculate values of Price Elasticity for all the situations below:

Price Quantity % change in quantity demanded % change in price Elasticity of Demand

Initial New Initial New

25 30 100 40 1. ___________

40 70 120 90 2. ___________

200 220 80 64 3. ___________

50 75 150 135 4. ___________

In each case identify whether you would describe it as elastic / unit elastic / inelastic

1. _________________________ 2. _________________________

3. _________________________ 4. _________________________

Step 2 – Elasticity and Revenue?

Different elasticity values will lead to different effects on the level of total revenue a firm receives. For example, if a good is elastic and a

firm increases the price by 10%, they will lose more than 10% of their business, and so although they are getting more money for each

one they sell, they are selling far fewer.

TR=Price x Quantity Sold

To see the effect that elasticity has on total revenue, fill in the table below:

Price Quantity Revenue Price Elasticity of Demand

Initial New Initial New Before price change After price change

25 30 100 40 1. ___________

40 70 120 90 2. ___________

200 210 80 64 3. ___________

50 75 150 135 4. ___________

Has revenue increased or decreased in each case?

1. _________________________ 2. _________________________

3. _________________________ 4. _________________________

Step 3 - Estimate E L A S T I C I T Y based on the determinants of elasticity

As we have seen above it is important to a company to have an idea of the value of the elasticity of demand of its good or service as it will affect what

happens to their total revenue as price changes. What should the company aim to do with their price in each of the

circumstances below?

Elasticity Which change in price would increase total revenue??

(Increase or decrease?)

Elastic

Inelastic

Judge the products in the table below to decide whether you think they will be elastic or inelastic:

Product Elastic or inelastic? Why?

Salt

Hawaiian Vacation

Apple iPhone

Cigarettes

Tap Water

Gasoline

Dasani Water