Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 6: Problem 1

Write the formula for the price elasticity of demand. Why isn't elasticity just measured by the slope of the demand curve?

Short Answer

Expert verified
The formula of price elasticity of demand is given by \[ PED=\frac{\% \text{ change in quantity demanded } Q}{\% \text{ change in price } P}\]. The reason elasticity is not just measured with the slope of the demand curve is because the slope features a constant unit of measurement regardless of the goods or services in question. The true measure of elasticity, however, should consider the sensitivity of quantity demanded to price changes, which can significantly vary between different goods or services.

Step by step solution

01

Price Elasticity of Demand Formula

The Price Elasticity of Demand (PED) formula is given by: \[ PED=\frac{\% \text{ change in quantity demanded } Q}{\% \text{ change in price } P}\] This formula indicates how responsive the quantity demanded is to a change in price.
02

Explanation of Formula

The numerator represents the percentage change in quantity demanded and the denominator represents the percentage change in price. If the absolute value of PED is greater than 1, it's elastic (i.e. a given change in price leads to a more than proportionate change in quantity demanded). If it's less than 1, it's inelastic (i.e., a given change in price leads to a less than proportionate change in quantity demanded). If it's equal to 1, the demand is unitary elastic.
03

Reason Behind the Slope not being a Measure of Elasticity

The slope of the demand curve isn't just a measure of elasticity due to the presence of a constant unit of measurement, regardless of the good being considered. The true measure of elasticity should take into account the sensitivity of quantity demanded due to change in price, and this can differ greatly between different goods. Therefore, just using the slope will ignore the differences in the relative size of the effects of price changes on quantity demanded across different goods.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Are the cross-price elasticities of demand between the following pairs of products likely to be positive or negative? Briefly explain. a. Iced coffee and iced tea b. French fries and ketchup c. Steak and chicken d. Blu-ray players and Blu-ray discs

One study found that the price elasticity of demand for soda is -0.78 , while the price elasticity of demand for Coca-Cola is \(-1.22 .\) Coca-Cola is a type of soda, so why isn't its price elasticity the same as the price elasticity for soda as a product?

Economists' estimates of price elasticities can differ somewhat, depending on the time period and on the markets in which the price and quantity data used in the estimates were gathered. An article in the New York Times contained the following statement from the Centers for Disease Control and Prevention: "A 10 percent increase in the price of cigarettes reduces consumption by 3 percent to 5 percent." Given this information, compute the range of the price elasticity of demand for cigarettes. Explain whether the demand for cigarettes is elastic, inelastic, or unit elastic. If cigarette manufacturers raise prices, will their revenue increase or decrease? Briefly explain.

Define the cross-price elasticity of demand. What does it mean if the cross- price elasticity of demand is negative? What does it mean if the cross-price elasticity of demand is positive?

The price of organic apples falls, and apple growers find that their revenue increases. Is the demand for organic apples elastic or inelastic?
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free