How Is Elasticity Measured

How Is Elasticity Measured - decrease in quantity (as with...

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How Is Elasticity Measured? As we have noted, elasticity can be roughly compared by looking at the relative steepness or flatness of a supply or demand curve. Thus, it makes sense that the formula for calculating elasticity is similar to the formula used for calculating slope. Instead of relating the actual prices and quantities of goods, however, elasticity shows the relationship between changes in price and quantity. To calculate the coefficient for elasticity, divide the percent change in quantity by the percent change in price: Elasticity = (% Change in Quantity)/(% Change in Price) Remember that to find percent change itself, you divide the amount of change in a variable by the initial level of the variable: % Change = (Amount of Change)/(Initial Level) Another important thing to remember is that percentage changes can be positive or negative, but elasticity is always an absolute value. That is, even when an increase in price is paired with a
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Unformatted text preview: decrease in quantity (as with most demand curves), the elasticity will be positive; remember to drop any minus signs when finding your final value for elasticity. Let's apply this and solve for elasticity in the market for ping pong balls. When ping pong balls cost $1 each, Alice is willing to buy 10 balls, and Joe is willing to sell 10 balls. When they cost $1.50 each, Alice is willing to buy 6 balls, and Joe is willing to sell 20. First, let's solve for Alice's price elasticity of demand: % Change in Quantity = (6-10)/10 = -0.4 = -40% % Change in Price = (1.50-1)/1 = 0.5 = 50% (-40%)/(50%) = -0.8 Take the absolute value to find elasticity. Elasticity of Demand = 0.8 Now, we use the same process to find Joe's price elasticity of supply: % Change in Quantity = (20-10)/10 = 1 = 100% % Change in Price = (1.50-1)/1 = 0.5 = 50% Elasticity of Supply = (100%)/(50%) = 2...
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