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The demand curve, Income elasticity of demand
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Question from BPP interactive text ( page 93)…
Example: arc elasticity of demand.
The price of a good is $1.20 per unit and annual demand is 800,000 units. Market research indicates that an increase in the price of 10 cents per unit will result in a fall in annual demand of 70,000 units.
what is the price elasticity of demand measuring the responsiveness of demand over this range of price increase?
Doubt: Annual demand at $1.30 per unit is 730,000 units (i couldn’t understand from where does the rate $1.30 come here).
The market research consultancye has given you information about how demand changes with each 10c change in price:
Starting point: at a price of $1.20, demand is 800,000
Increase price by 10c: price $1.30, demand will have decreased by 70,000 to 730,000.
i thought the formula for point elasticity is (New demand-old demand/old demand*100)/(New Price-old price/old price*100).why are you using the new demand and new price as the denominator.
what is the differences between arc price elasticity and point price elasticity of demand ?
Point elasticity is calculated at a single point. You need the equation of tthe demamd curve ro do that.
The arc elasticity is calculated over the distance between two points. That can be done using a tabular approach.
thank you!
If price elasticity is 1, revenue should stay the same right? However, if demand is 100 at a price of 20, revenue would be 2000. If price is reduced by 50% as a result demand increases by 50% elasticity should be 1, but the revenue is not the same, 10*150 = 1500.
Using the arc elasticity of demand, the elasticity of demand is not 1, but 0.6.
The point elasticity of demand is used when there is a certain point specified in the question.
Hence, the revenue did not remain the same.
*price elasticity of demand
It’s because you are making a big leap in price and that messes things up as the elasticity of demand constantly changes over the demand curve. If you reduce price by 0.1% you will see that revenue is almost constant. Even better if price is reduced by only 0.01% etc.
Very good for revision notes