Elasticity and its Appliceations

Note that in comparing two TRs, whichever yields a higher TR, holding

Otner things constant, the price charged is the best price of the good, whether

it 1s the old price or the new price.

Let us nowW analyze this equation by looking at the examples provided below.

Example l:

Cecilia sells bangus for PHP 100 and her Q 500. When she decides to sell

1t tor PHP 125, her Q, becomes 450. Should Cecilia sell her bangus at PHP T00

or PHP 125? Is Q, elastic or inelastic?

olution:To get the percentage change in demand, simply divide

the change in quantity demanded by the average quantity

demanded. From the above problem, we can express it as:

-0.11

o change in Qa

change in Qa 450-500 -50

475

averageQa

500+450

Then, apply the same formula in getting the percentage change n

price.

25

0.22

To change in P=

change in P

average P
125-100

TO0+125 I12.5

Since we already know the percentage changes in quantity demanded

and price, we can now solve for the price elasticity of demand using the

given formula:

Price Elasticity of Demand

o change in Q

9% change in P

-0.11

0.22

= 1-0.5| or 0.5