Assignment:
Price Elasticity of Demand
How do we define price elasticity of demand?
The Price Elasticity Coefficient and Formula
How do we measure price elasticity of demand? What is in the numerator of elasticity equation? What is in the denominator?
In elasticity calculations, we use the midpoint formula to determine percentage changes.
According to midpoint formula, how do we measure percentage change in quantity demanded? How do we measure percentage change in price?
Interpretations of Ed
If price elasticity of demand for a commodity is _____ 1, demand is elastic. What does elastic demand indicate in terms of how responsive consumers are to price changes?
If price elasticity of demand for a commodity is _____ 1, demand is unit-elastic.
If price elasticity of demand for a commodity is _____ 1, demand is inelastic. What does inelastic demand indicate in terms of how responsive consumers are to price changes?
Price Elasticity along a Linear Demand Curve
Demand curve in Figure 6.3 is drawn based on data from Table 6.1 regarding movie tickets.
According to first two rows, when price of a movie ticket falls from $8 to $7, quantity demanded rises from 1000 to 2000 (a movement from point a to point b). What is price elasticity of demand in this region? Is demand elastic, unit-elastic, or inelastic?
According to rows four and five, when price of a movie ticket falls from $5 to $4, quantity demanded rises from 4000 to 5000 (a movement from point d to point e). What is price elasticity of demand in this region? Is demand elastic, unit-elastic, or inelastic?
According to rows seven and eight, when price of a movie ticket falls from $2 to $1, quantity demanded rises from 7000 to 8000 (a movement from point g to point h). What is price elasticity of demand in this region? Is demand elastic, unit-elastic, or inelastic?
Report whether there is a pattern in price elasticity of demand (rising, falling, or constant) as we go from point a to point h on the demand curve.
Determinants of Price Elasticity of Demand
There are three factors that affect price elasticity of demand: number of available substitutes for the commodity, proportion of income spent on the commodity, and luxury vs. necessity nature of the commodity.
1. Substitutability
All else constant, the larger the number of available substitutes for a commodity, the _____ is the price elasticity of demand for that commodity.
Explain why with an example. You may refer to Table 6.3 that reports price elasticity data for a wide range of products.
2. Proportion of Income
All else constant, the larger the share of income spent on a commodity in consumer's budget, the _____ is the price elasticity of demand for that commodity.
Explain why with an example. You may refer to Table 6.3.
3. Luxuries versus Necessities
All else constant, the more a commodity is perceived as a luxury rather than a necessity, the _____ is the price elasticity of demand for that commodity.
Explain why with an example. You may refer to Table 6.3.
Materials for Lecture 5
Start with textbook to get familiar with content and progression of the lecture. Then, go to videos (and supplemental articles, if provided) for further clarification and additional examples.
Textbook
Read carefully pages 135-137 and 139-142 from textbook.
Video
Price Elasticity of Demand
https://www.youtube.com/watch?v=4oj_lnj6pXA&list=PL336C870BEAD3B58B&index=17
Determinants of Price Elasticity of Demand
https://www.youtube.com/watch?v=EafTlle73ic&list=PL336C870BEAD3B58B&index=18
Alternative series of lectures on price elasticity of demand
https://www.khanacademy.org/economics-finance-domain/microeconomics/elasticity-tutorial/price-elasticity-tutorial/v/price-elasticity-of-demand