CONCEPTUAL QUESTIONS FOR DISCUSSION

1. What is elasticity (in economics)?

Elasticity is an economics concept that measures responsiveness of one variable to changes in

another variable

2. What is price elasticity of demand?

A measure of the responsiveness/sensitivity of demand to changes in price. i.e. by how much

does the quantity demanded change when the price changes. When quantity demanded is
insensitive (i.e. changes a little) to price changes, then demand is said to be inelastic. When it is
sensitive (i.e. changes a lot) to price changes, then the demand is said to be elastic.

Example: Inelasticity of the pies in the cafeteria

They cost K12 last semester, but although the price has increased to K15, they are still often sold
out by 14:00hrs. So the quantity demanded has not decreased by much despite the price increase,
therefore UNILUS students’ demand for cafeteria pies is fairly inelastic.

3. Give one example of a good that has an inelastic price elasticity of demand. Explain
your reasons.
4. Give one example of a good that has an elastic price elasticity of demand. Explain
your reasons.
5. Do you think the demand for fuel is inelastic or elastic? Why?
6. What are the determinants of price elasticity of demand?
7. How do these determinants affect the elasticity of your chosen goods in question 3
and 4?
8. How do these determinants affect the elasticity of gasoline?
 CALCULATING PRICE ELASTICITY OF DEMAND

E %change∈ quantity
p=¿ ¿
%change∈ price

We can think of this ratio as a comparison of how much quantity demanded has changed to how
much the price has changed. If the percentage change in quantity is greater than the
percentage change in price then this ratio will equal a number greater than 1. If the percentage
change in quantity is greater than the percentage change in price, then it means that when the
price changes, the quantity demand will change by a greater proportion. In other words, the
quantity demanded is sensitive to changes in price. It is elastic.

Elastic when E p >1 , inelastic when E p <1 and unitary elastic when E p =1

What do you think it means when this ratio equals one?

This ratio is almost always negative number, and therefore we must take the absolute value.
Can you explain why this ratio is almost always negative? Research or homework question.

METHODS OF CALCULATING E p

1. Can you write the formula for the arc price elasticity of demand (from memory)?

2. Write the formula for point price elasticity of demand.

Note that both the arc and point formula are both based on the above ratio. They differ only in
the way they calculate the percentage changes. For example, to calculate the %change in
quantity, the point formula divides the change in quantity by the initial quantity (i.e. Q1), but the
arc formula divides the change in quantity by the average of the initial and final quantity

3. Calculate the arc price elasticity of demand in the following scenarios:

1. When the price of Good B increased from $30 to $40, the quantity consumers
purchased decreased from 1,200 to 1,100.
2. When the price of Good C increased from $5 to $6, the quantity consumers purchased
decreased from 1,000 to 600.

3. When the price of Good D increased from $2 to $4, the quantity consumers purchased
decreased from 1,200 to 700.

4. Calculate the point price elasticity of demand in the 3 scenarios above.