Question

Talk about price elasticity of demand, and how it is different from income elasticity. Propose and calculate a numerical example for each. Also describe price elasticity of supply and use its formula to numerically calculate an example. In each case, make sure to identify whether the outcome is elastic/inelastic/unit elastic, and what the sign of the outcome implies. SHORT ANSWER PLEASE!

Answer 1

Price elasticity shows the sensitivity of change in quantity demanded as a result of change in quantity.Income elasticity shows the sensitivity of change in quantity as a result of change in income.

Example of price elasticity.

Suppose a 5% rise in price reduces the demand for a product by 15%

Price elasticity (Ed)=%Change in quantity/%Change in price.

Ed=-15%/5%

Ed=-3

When Ed>1(in absolute terms) the demand is elastic.

Example of elasticity of income.

A rise in income by 40% increases demand by 10%

Income elasticity of demand(Em)=%change in quantity/%change in income.

Em=10%/40%

Em=.25%

Since Em<1,the income elasticity of demand is inelastic.

Price elasticity of supply is sensitivity of change in quantity supplied as a result of change in price.

Es(Elasticity of supply)=%Change in quantity supplied/%Change in price.

Suppose a 5% rise in price changes quantity supplied by 5%

Elasticity of supply=5%/5%

Es=1

The elasticity of supply is unity.