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Calculate the elasticity of demand when an increase in supply causes the equilibrium...

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yaga49 | Valedictorian

Posted April 28, 2013 at 3:29 PM via web

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Calculate the elasticity of demand when an increase in supply causes the equilibrium and quantity to change from $9 and 2,000 to $7 and 3,000 respectively.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted April 28, 2013 at 4:36 PM (Answer #1)

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If we are to find a numerical value for the price elasticity of demand in this case, we have to use the following equation:

Elasticity of demand  = percentage change in quantity demanded / percentage change in price.

What this means is that we will have to find the percentage change in quantity demanded and the percentage change in the price.  This will only tell us the elasticity, however, for a reduction in the price.  An increase in the price will have a different elasticity.

To find the percentage change in quantity demanded (QD), we take the QD after the price change, subtract the QD before the price change, and divide that result by the QD before the price change.  It looks like this:

(3000 - 2000) / 2000 = 1000 / 2000 = ½ = 50%.

There was a 50 percent change in QD.

Now, we do the same thing with the price.  It looks like this:

(7 – 9) / 9 = -2 / 9 = 22%

There was a 22 percent change in price.

Now, we divide the change in QD by the change in price.

50/22 = 2.3

So, if we are looking only at the elasticity coefficient for a decrease in price, we would say that the elasticity coefficient for this drop in price is 2.3

Again, please note that this is only the elasticity for the decrease in price.

Thus, the elasticity of demand is 2.3.

 

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