Holt 7525-9 S15_IT

Example 4A: What is price elasticity of demand if price changes from $7 to $6?
The percentage change in quantity demanded is calculated as the change in quantity demanded
(30 – 20 = 10) divided by the average quantity demanded ([30 + 20]/2 = 25) or 10 ÷ 25 = .4000.
The percentage change in price is calculated as the change in price (6 – 7 = 1) divided by the
average price ([6 + 7]/2 = 6.5) or 1 ÷ 6.5 = .1538.
Thus, the price elasticity of demand for a change in price from $7 to $6 is .4000 ÷ .1538 = 2.60.
The above calculations can be expressed using the formula, as shown below:
Q 2 – Q 1 30– 20 10
(Q 2 + Q 1 )/2 (30+ 20)/2 25 .4000
E D = ————— = —————— = —— = ——— = 2.60
P 2 – P 1 6 – 7 1 .1538
(P 2 + P 1 )/2 (6 + 7)/2 6.5
Example 4B: What is price elasticity of demand if price changes from $6 to $5?
Q 2 – Q 1 40– 30 10
(Q 2 + Q 1 )/2 (40+ 30)/2 35 .2857
E D = ————— = —————— = —— = ——— = 1.57
P 2 – P 1 5– 6 1 .1818
(P 2 + P 1 )/2 (5 + 6)/2 5.5
Example 4C: What is price elasticity of demand if price changes from $5 to $4?
Q 2 – Q 1 50– 40 10
(Q 2 + Q 1 )/2 (50+ 40)/2 45 .2222
E D = ————— = —————— = —— = ——— = 1.00
P 2 – P 1 4– 5 1 .2222
(P 2 + P 1 )/2 (4 + 5)/2 4.5
Example 4D: What is price elasticity of demand if price changes from $4 to $3?
Q 2 – Q 1 60– 50 10
(Q 2 + Q 1 )/2 (60+ 50)/2 55 .1818
E D = ————— = —————— = —— = ——— = .64
P 2 – P 1 3– 4 1 .2857
(P 2 + P 1 )/2 (3 + 4)/2 3.5
Example 4E: What is price elasticity of demand if price changes from $3 to $2?
Q 2 – Q 1 70– 60 10
(Q 2 + Q 1 )/2 (70+ 60)/2 65 .1538
E D = ————— = —————— = —— = ——— = .38
P 2 – P 1 2– 3 1 .4000
(P 2 + P 1 )/2 (2 + 3)/2 2.5
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
17 - 3 Elasticity