ECONOMICS
ELASTICITY OF DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Revenue falls by £10, 400
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Revenue falls by £9, 600
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Revenue increases by £5, 600
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Revenue increases by £10, 200
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Detailed explanation-1: -The price elasticity of demand (which is often shortened to demand elasticity) is defined to be the percentage change in quantity demanded, q, divided by the percentage change in price, p. The formula for the demand elasticity (ǫ) is: ǫ = p q dq dp .
Detailed explanation-2: -In case the two goods are not related, the Coefficient of Cross Elasticity is zero. In case the two goods are substitutes for each other like tea and coffee, the cross price elasticity will be positive, i.e. if the price of coffee increases, the demand for tea increases.
Detailed explanation-3: -In this case, changes in price have a more than proportional effect on the quantity of a good demanded. A PED coefficient equal to one indicates demand that is unit elastic; any change in price leads to an exactly proportional change in demand (i.e. a 1% reduction in demand would lead to a 1% reduction in price).
Detailed explanation-4: -PED = % Change in Quantity Demanded ÷ % Change in Price. Example 1. Answer: PED =-0.3. Note also that there are no ‘units of elasticity’. Example 2. Answer: PED =-1.67. Note that this time the value of PED is greater than-1. More items