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Microeconomics.

     The  price  elasticity  of  demand  which  is  popularly  just  referred  to  as   price  elasticity  is  a  measure  of  the  rate  of  response  of  quantity  demanded  when  price  changes (Backman ,1953).  We  have  the  following  data  to  work  with.

Old   price  of  a  gallon  of  paint=$3.00

0
0
DAYS
:
0
0
HOURS
:
0
0
MINUTES
:
0
0
SECONDS
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New  price  of  a  gallon  of   paint  =$3.50

Old  quantity  demanded= 35  gallons  of  paint  per  month.

New  quantity  demanded= 20  gallons  of  paint  per  month.

Calculation  of  elasticity  entails  first  a  computation  of  percentage   change  in  quantity  demanded   per  month  and  percentage  change   in  price.

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     Calculating  the  percentage  change  in  quantity  demanded  per  month

The  formula  used  to  calculate  the  percentage  change  in  quantity  demanded  is 

[ Quantity  demanded ( New) -Quantity  demanded (Old) ] / Quantity  demanded  (old) .   (Backman, 1953)

Substituting   values:

[20-35] / 35 = -15/35 = -0.4286

The  percentage  change  in  quantity  demanded  is  thus = -0.4286  in  decimal  form. This  translates  to  -42.86% .

 

    Calculating  the  percentage  change  in  price:

 [Price (New) - price(Old)] / Price (Old).

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50 - 3.00] / 3.00  = ( 0.50/3.00) = 0.1667.  = 16.67%

 

Since  we  have  already  calculated  the   percentage  change  in  quantity  demanded   and  the  percentage  change  in  price , we  now  calculate  the  price  elasticity  of  demand.

    Calculating  the  price  Elasticity  of  demand.

Price  elasticity  of  demand  = (%  Change  in  Quantity  Demanded)  /  (% Change  in  Price).     (Backman ,1953)

Substituting   using    the  calculated  values:

PEOD = - 0.4286/0.1667 = - 42.86% /16.67% =  -2.5711.

      When  analyzing  price  elasticity , we  take  the  absolute  value  hence  we  ignore  the  negative  sign.  Thus  in  our  case , the  price  elasticity  of  demand  when  the  price  increases  from   $3.00  to  $3.50  is  2.5711. 

If   price  Elasticity  of  demand  > 1 then  Demand  is  price  Elastic ( Demand  is  responsive  to  price  changes).

If   price  Elasticity   of  Demand  = 1  then  Demand  is  said  to  be  Unit  Elastic.

If  Price  Elasticity  of  demand  is  < 1 then  Demand  is  price  Inelastic  (Demand  is  not  responsive  to  price  changes)  . (Backman ,1953)

In  our  calculation  we  have  obtained  a  price  elasticity  of  demand  =  2.

5711.   which  is  greater  than  1  . This   shows  that   our  Demand   for  paint   is  price  Elastic.

 

        Interpretation  of  the  price  Elasticity  of  Demand.

Since  we  have  obtained  an  high  price  Elasticity  of  Demand,  our  Demand  for  paint  is  very  sensitive  to  price  changes. When  the  price  of  paint  goes  up  , a  great  deal  less  of  it  is  bought  and  when  the  price  goes  down , a  great  deal  more  of  it  is  bought.

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