Posted by steve on .
Suppose the price of widgets falls from $7 to $5 and consumption of widgets rises from 15 widgets a month to 25 widgets. Calculate your price elasticity of demand of widgets. What can you say about your price elasticity of demand of widgets? Is it Elastic, Inelastic, or Unitary Elastic? Why? Use the Midpoint formula and please show your work.
(a) Price Elasticity of demand of widgets
= (Change in Quantity of demand X/Original Quantity of demand X) divided by (Change in price of X/Original Price of X)
Change in Quantity = 15 - 25 = -10
Original Quantity = 25
Change in Price = (7 - 5) = 2
Original Price = 7
= (-10 / 25) / (2 / 7) = - 1.4
(b) As stated by the law of demand, when the price of a goods falls, quantity demand rises. The price elasticity of demand of widgets is greater than 1 so it is relatively elastic.
(c) I Demand is elastic if a specific percentage change in price results in a larger percentage change in quantity demanded. In such cases, Ed will be greater than 1. t is elastic.
Ed= (Change in Quantity/Sum of Quantities/2) divided by (Change in price/sum of price/2)
= -10/(40/2) / -2/(12/2)
= (-10/20) / (-2/6)