Question

A price ceiling for housing sets rent at maximum of $1,300, with Qd of 1,000 apartments....

A price ceiling for housing sets rent at maximum of $1,300, with Qd of 1,000 apartments. Before equilibrium was $850 with Qd of 1,100. What is the elasticity of demand for housing in our scenario? Use the points provided in the demand curve. Is housing elastic or inelastic, comment on what elasticity is doing to consumer and producer behavior in this scenario?

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Answer #1
Elasticity of Demand = -Percentage Change in Quantity Demanded/Percentage Change in Price

Percentage Change in Quantity Demand = Change in Demand/Old Demand

Percentage Change in Quantity Demand = (1,100-1000)/1,000

Percentage Change in Quantity Demand = 10%

Percentage Change in Price = Change in Price/Old Price

Percentage Change in Price = (850-1300)1300

Percentage Change in Price = -34.61%

Elasticity of Demand = -10%/-34.61%

Elasticity of Demand = 0.289

Demand is inelastic and graph would look like:

Since elasticity is inelastic, change in prices does not affect much to the consumers and suppliers cannot make huge profits by changing prices. Consumers will demand nearly same or little different.

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