Chapter 20, Problem 1VQP

To determine

Calculation of price elasticity of demand.

Explanation of Solution

The midpoint formula for calculating price elasticity of demand is given below:

$\text{Price elasticity of demand}=\frac{\frac{\frac{\left({\text{Qunatity}}_{\mathrm{Pr}\text{evious}}-{\text{Qunatity}}_{\text{Present}}\right)}{\left({\text{Qunatity}}_{\mathrm{Pr}\text{evious}}+{\text{Qunatity}}_{\text{Present}}\right)}}{2}}{\frac{\frac{\left({\text{Price}}_{\mathrm{Pr}\text{evious}}-{\text{Price}}_{\text{Present}}\right)}{\left({\text{Price}}_{\mathrm{Pr}\text{evious}}+{\text{Price}}_{\text{Present}}\right)}}{2}}$        (1)

Nominator of the equation is the percentage changes in quantity demanded, and denominator is the percentage changes in price. Substitute the respective values in Equation (1) to calculate the price elasticity of demand, which is equal between points A and B.

 $\begin{array}{c}\text{Price elasticity of demand}=\frac{\frac{\frac{\left(100-80\right)}{\left(100+\text{80}\right)}}{2}}{\frac{\frac{\left(12-\text{10}\right)}{\left(12+\text{10}\right)}}{2}}\\ =\frac{\frac{20}{90}}{\frac{2}{11}}\\ =\frac{0.222222}{0.181818}\\ =1.22\end{array}$

Price elasticity of demand is 1.22.

Economics Concept Introduction

Price elasticity of demand: Price elasticity of demand shows the responsiveness of quantity demand due to a change in price.