1
ECONOMICS 100
NOTES ON PROBLEM SET #2
(Elasticity; Market Interventions)
1.
Elasticity
1.1
Calculating Elasticity
Consider the demand schedule given by the equation: p = 10 – 1q, and the points A
(p = $8; q = 2) and B (p= $6 and q = 4).
The diagram below shows this.
Now
calculate the point elasticity at A, and the arc elasticity between A and B.
P
10
A ($8, 2)
B ($6, 4)
10
Q
1.1
Arc Elasticity:
Between A and B:
?
q = 2
Avg q = 3
?
q = -2
Avg p = 7
For Arc Elasticity, use mid-point formula to compute % changes:
Arc Price Elasticity of Demand = - %
?
q / %
?
p = - [2/3
/ -2/7] = 7/3
Point Elasticity of Demand:
Point Elasticity of Demand =
- [
?
q /
?
p] * p/q
At point A: p = 8; q = 2.
[
?
q /
?
p] = run / rise or 1/slope of D = -1.
So, E
D
= - (-1) * 8/2 = 4

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