Price elasticity

• Economie
• Middelbare school
• havo
• Leerjaar 3

Price elasticity

The price elasticity tells how strong the demand reacts on a change of the price. 

Elastic

A product is (price)elastic when the demand stongly reacts on a change of the pirce. 

For example: When the price increases by 1 percent, the demanded quantity will drop more than 1 percent. 

The other why around, when the price drops with 1 percent, the demanded quantity will rise more than one percent. 

Elastic

Luxery products are elastic: for example expensive holidays and the newest televisions. When the price drops, the demand rises strongly. 

Inelastic

A product is (price)inelastic when demand doesn't react strongly on a change of price. 

For example when the price increases with one percent, the demand will drop less than one percent. 

The other way around, when price drops with one percent, the demand will rise less than one percent. 

Inelastic

Examples of inelastic products are bread and fuel. Despite the price, people keep using them as much as they did before.

Inferior 

There are products people will buy less when their income increases. Consumers see these products as less worthy than other, more expensive simular products. When their income increases consumers buy a better and more expensive substitute product to replace the old one. 

Inferior 

Examples of inferior products are: holiday in your own country. (people will travel abroad) or meat (they buy more expensive meat). 

When a product is elastic and the price increases with 2%. Then the demand will........

1. decreases with more than 2%
2. decreases with less than 2%
3. increases with more than 2%
4. increases with less than 2%

Elastic, inelastic, inferior

Calculate price elasticity

Calculation for the price elasticity:

                    

E_d between 0 and -1: inelastic

E_d smaller than -1: elastic

Example

Calculation for the price elasticity:

                    

The price of a product increases with 2%. 

The demand for this products decreases with 5%

E_d= -5/2 = -2,5                                -2,5 = < -1= elastic

1. The price drops with 10%, demand increases with 20%. What is the elasticity?

1. Ed = -2 Inelastic
2. Ed = -2 Elastic
3. Ed = -0,5 Inelastic
4. Ed = -0,5 Elastic

Explanation

Formula price elasticity:

E_d = 20% / - 10% = -2

This is smaller than -1, so elastic

2. A price increases with 10%. The elasticity is -1. What is the change of the demand?

1. Decreases with 1%
2. Decreases with 10%
3. Increases by 1%
4. Increases by 10%

Explanation

Formula

- 1 = percentage change E_d / 10%

percentage change Ed = -1 x 10% = - 10%

3. Price drops with 5%.
The elasticity of the demand is -2.
By what percentage will the demand change?

1. Increases with 10%
2. Increases with 2,5%
3. Decreases with 2,5%
4. Decreases with 10%

Explanation

Formula:

- 2 = percentage change E_d / - 5%

percentage change demand = -2 x - 5% = 10%

4. A product is inelastic. The price decreases. What will happen with the demand?

1. The demand will increase with a bigger percentage than the change of the price
2. The demand will increase with a smaller percentage than the change of the price
3. The demand will decrease with a bigger percentage than the change of the price
4. The demand will decrease with a smaller percentage than the change of the price

Explanation

With an inelastic product the demand will increase with a smaller percentage than the change of the price

When price increases, the percentage change of the supply will decrease less than the percentage change of the price. 

5. Elasticity is -3. The demand increases by 15%. By what percentage has the price been decreased?

1. 3%
2. 5%
3. 15%
4. 45%

Explanation

Formula:

- 3 = 15 / percentage change of the price 

pergentage change of the price = 15% / - 3 = - 5%

(Decreased by 5 %)

Price elasticity and the demand function

You can calculate the price elasticity when there is a demand function and a change of price. 

First calculate the percentage change of the price, then calculate the percentage change of the quantity demanded. 

Example

The demand function is: q_d = -10p + 500

The price increases from €10 too €15.

What is the price elasticity?

Example answer

E_d= -12,5 / 50 = -0,25

-0,25 = inelastic

Extra exercise

Demand function: q_d = -2p + 100

Price increases from 10 to 11. 

What is the price elasticity? 

Qd = -50p + 1.000
Price increases from €4 to €5
What is the price elasticity?

Extra exercise: answer

E_d= -2,5% / 10% = -0,25

-0,25 = inelastic

The elasticity is -2. The price increases with 10%. The old quantity demand was 20.000. What is the new quantity demand?

1. 16.000
2. 18.000
3. 22.000
4. 24.000

Elasticity is -0,5. The quantity demand had been increased with 10%. The old price was € 25. What is the price now?

1. € 20
2. € 23,75
3. € 27,50
4. € 30

Elasticity is -0,2.
The price has been decreased by 5%.
The new quantity demand is 1000.
What was the old quantity demanded?

1. 950
2. 952
3. 900
4. 990

Turnover was € 10.000
Old price was € 5; The price has decreased with 10%
Elasticity -4
What is the new turn over?

1. € 9.000
2. € 12.500
3. € 12.600
4. € 14.000