Econ- Computing PED

Econ Computing PED - quantity demanded to changes in price this is an elastic demand The Midpoint Method a better way to calculate percentage

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Subject: Principles of Microeconomics Topic: Computing Elasticity Computing the Price Elasticity of Demand Price Elasticity of Demand: a measurement of how much quantity demanded changes to a movement in price. So to compute this we use percentage changes. Price Elasticity of demand= percentage change in quantity demanded/percentage change in price. For example: Suppose that a 10 percent increase in the price of an ice-cream cone causes the amount of ice cream you buy to fall by 30 percent. o The P.E.D would be 30%/10% so the P.E.D would be 3. o The elasticity is 3, which shows that the change in the quantity demanded is proportionately three times as large as the change in price. o As the quantity demanded is virtually always related to price, economists disregard the negative signs in their calculations. (i.e. taking the absolute value of your calculations in mathematics). o In this case, a price elasticity larger than 1, implies a greater responsiveness of
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: quantity demanded to changes in price- this is an elastic demand. The Midpoint Method: a better way to calculate percentage changes and elasticities. Trying to calculate the price elasticity of demand between two points on a demand curve, the elasticity from point A B is different from point B A. • One way to eradicate this issue is to use the midpoint method . The standard procedure for calculating a percentage change is to divide the change by the initial level. Using the midpoint method, one divides the change by the average of the end/initial level. • Take for instance a change from $4 to $6, or $6 to $4. Either way it is a 40% rise or fall. So price elasticity of demand= [(Q 2-Q 1 )/(Q 2 +Q 1 )÷2]/ [(P 2-P 1 )/(P 2 +P 1 )÷2] This should be used whenever you calculate elasticity....
View Full Document

This note was uploaded on 10/17/2011 for the course ECON 2023 taught by Professor Unknown during the Fall '05 term at Arkansas.

Ask a homework question - tutors are online