chapter four Elasticity of Demand and Supply ANSWERS TO END-OF-CHAPTER QUESTIONS 4-1 What is the formula for measuring price elasticity of demand? What does it mean (in terms of relative price and quantity change) if the price elasticity coefficient is less than 1? Equal to 1? Greater than 1? Price elasticity of demand is found by dividing the percentage change in quantity demanded by the percentage change in price. Over a range of prices, we use the midpoint formula:
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thoroughly explain elasticity. You are expected to cover issues such as: a. What is it? Elasticity is how the demand or supply curve’s change to a change in the product. Whether it be price, quantity or another factor in the market. There are different elasticity calculations that can be used. Price elasticity of demand is the % change in quantity demanded / % change in price. Price elasticity of supply is the % change in quantity supplied / % change in price. Income elasticity of demand is the % change
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Some of the key decision making factors of taxations are: adequacy, broad basing, efficiency and equity. The price elasticity of demand is a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buyers’ plans remain the same. The income elasticity of demand is a measure of the responsiveness of the demand for a good or services to a change in income, other things remaining the same. VAT is an indirect tax where the tax
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Understanding elasticity of demand as it relates to elastic, unit, and inelastic demand. Elasticity is the amount by which economists use to calculate the sensitivity of the quantity demand of a good to alter in its price, otherwise identified as elasticity of demand or (PED or Ed). Price elasticity is generally perceived as a negative although the sign is frequently ignored. Only goods that ignore the law of demand such as luxury or inferior goods have a positive price of elasticity of demand in other
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−0.3 is the price elasticity for subway rides. This is inelastic. b. Ridership probably would not return to the original level because some people may have invested in alternatives (cars, etc.) or found other transit options that they are reluctant to give up. 7. Any demand function can be decomposed into percentage changes and elasticities of the component parts. If Q = f(P, A), where P is price, A is advertising, ED and EA are price and advertising elasticities, then: %ΔQ = %ΔP(ED)
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the three main necessities of life support around the world. Food is important to everyone’s needs for life well being and nurturing for life support and health. Fuel and oil is essential for operating the vehicles transporting food, and supplies in demand, traveling, and driving to and from work. Fuel is one of the main resources used to help make everything work as individuals rely on for driving or operating. However, everything is mobilized by transportation, using fuel of some kind weather its
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& Global Business Price elasticity of demand is a measure to show how sensitive the demand for a product or service is to a change in price. The percentage change in quantity demanded due to a percentage change in demand price. If a product or service is elastic a company should lower prices, this will increase demand and total revenue will increase. If the product or service is inelastic the price should be raised this would cause a slight decrease in demand but total revenue would increase
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Chapter 7: Elasticity 1 What you will learn in this chapter 1. Define and measure elasticity of demand and elasticity of supply. 2. Determine the relationship between demand elasticity and total revenue. 3. Understand the factors that determine elasticity of demand and elasticity of supply. Punchline • Imagine that some event drives up the price of gasoline (think about two examples) • How would consumers respond to the higher price? • By how much would consumption of gasoline fall? Answer
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most classic application examples of supply and demand is the gas/petroleum market. Gas prices are established through basic supply and demand, when demand rises and supply falls, prices rise quickly; and just the converse when supply increases and demand falls, prices decrease (although rare in modern day occurrence). Fluctuations in gas prices are also the result of multiple industry factors including uncertainty in the economy, economic demands for oil and the price per barrel of oil. Speculation
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from $2.25 to $1.75. As a result, the firm’s daily sales of these sundaes have increased from 1500 a day/ to 1800 a day. Compute the arc price elasticity of demand over this price and consumption quantity range. The arc price elasticity can be computed with the formula of arc elasticity. After the calculation we are getting that the arc price elasticity will be equal to 0.72 which is less than 1, that means that the price is inelastic. 4. The subway fare in your town has just been increased from
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