Elasticity Of Demand And Supply

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Elasticity is a measure of how one variable changes in response to another. Elasticity of demand or supply is the degree of responsiveness of demand or supply respectively to changes in price. Therefore, price elasticity of demand is the percentage change in quantity demanded of a good/service divided by the percentage change in price. The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price. If a slight change in price causes a big change in quantity demanded/supplied then demand or supply is said to be elastic, and the elasticity is greater than one. If, a fairly considerable change in price make little difference to the quantity demanded/supplied elasticity is less than one, then demand or supply is said to be inelastic. If however, demand or supply respond proportionally, then elasticity is said to be unitary. Best way to calculate elasticity is to use the average percentage change in quantity and price, the Midpoint Method for Elasticity is used. In this case we have, 2014 Data. Quantity = 1.6 billion bushels Average price= $3 per bushel 2015 Data Quantity =1.8 billion bushels Average price = $2.50 per bushel The price elasticity of demand for corn using the Midpoint method from 2014 to 2015. Percentage change in quantity demanded Q2-Q1/((Q2+Q1)/2)×100% 1.8-1.6/((1.8+1.6)/2)×100% (0.2/1.7)×100%=11.765 Percentage change in price P2-P1/((P2+P1)/2)×100% 2.50-3.00/((2.50+3.00)/2)×100% (-0.5/2.75)×100%= -18.18 Price elasticity of demand Percentage change in quantity ÷ Percentage change in price. 11.765/-18.18 =-0.65 The answer is 0.65. The formula uses the same base for both of the cases, giving the same elasticities between two points regardless of a price increase or... ... middle of paper ... ... the price they charge times the quantity sold ( toll tickets bought by people crossing). So for them to get as much revenue as possible percentage change in quantity demanded should be smaller than percentage change in price, a percentage rise in price will result in a smaller percentage fall in quantity demanded rising total revenue. A price hike increases total revenue only if demand is inelastic. There are goods critical to our life and our taste for such goods is so strong that we cannot imagine living without them. As a result we do not change our consumption of necessities very much when price increases. References: The Economy Today, Twelfth Edition, Bradley R. Schiller, McGraw-Hill International Edition. OpenStax Economics, Principles of Economics. OpenStax CNX. May 18, 2016. Retrieved from http://cnx.org/contents/69619d2b-68f0-44b0-b074-a9b2bf90b2c6@11.330
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