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Unformatted text preview: Worksheet and Study Guide for Chapter 4 1) Find the slope of a line (Supply or Demand) and calculate Ed (elasticity of Demand) or Es (Elasticity of Supply). Slope is rise (vertical distance) over run (horizontal distance). For Demand, often the easiest way is to look at the vertical intercept and the horizontal intercept. 6 5 4 3 2 1 5 10 15 20 25 30 Quantity Price The "rise" here is 5 (vertical intercept) and the "run" is 25 (horizontal intercept). So the slope is -5/25 = -1/5 = -0.2 (The slope is negative because the line slopes down.) Sometimes, in economics we ignore the minus sign (knowing that Demand slopes down) and just report the absolute value of the slope, 1/5 or 0.2. You can also find the slope using any two points on the demand curve. For example, if you were given the points (Q=5, P=4) and (Q=10, P=3), then the rise is the vertical distance between the points (3-4 = -1) and the run is the horizontal distance between the points (10-5=5). Putting these together, we get -1/5, same as above. Once you have the slope, it is easy to find the elasticity at any point on this line. The formula is Ed = (P/Q)*(1/Slope) So at the point (Q=15, P = 2), Ed = (2/15)*(5) = 10/15 = 2/3 = .67 (Note that this point is below the midpoint, so it is correct to find Ed<1) When working with a Supply curve, we always find the slope by using two points on the line as there will be only one intercept. 20 40 60 80 100 120 140 10 20 30 40 50 60 So I can pick any two points and find the rise and the run. Take these two points (Q=0, P=20) and (Q=10, P=40) The "rise" is (40-20) = 20. The "run" is (10-0) = 10. So the slope is 20/10 = 2. To find Es at any point, use Es = (P/Q)*(1/Slope). (This is the same formula you used to find Ed.) So at the point (Q=10, P=40), Es = (40/10)*(1/2) = 2 And at the point (Q=40, P=100) Es = (100/40)*(1/2) = 50/40 = 5/4 = 1.25 Note that Es gets smaller as you move along the curve, but that it always remains elastic, which is the case when Supply intersects the vertical axis. 10...
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This note was uploaded on 11/15/2011 for the course AGEC 7100 taught by Professor Duffy,p during the Fall '08 term at Auburn University.
- Fall '08