Question 1

How is price elasticity of demand calculated using the percentage method?

Accepted Answer

Price elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in price. The formula is E-D equals delta Q by Q over delta P by P. For example, if quantity demanded decreases from 50 to 40 gallons while price increases from $3 to $8 per gallon, the percentage changes are calculated separately, then divided to yield the elasticity coefficient.

Question 2

Why is price elasticity of demand always negative?

Accepted Answer

Price elasticity of demand is negative because of the inverse relationship between price and quantity demanded. When price increases, quantity demanded decreases, and vice versa. This negative value reflects the law of demand and indicates that consumers respond to price changes by adjusting their consumption in the opposite direction.

Question 3

What does a price elasticity coefficient of -0.12 tell us about consumer behavior?

Accepted Answer

An elasticity coefficient of -0.12 indicates low price responsiveness. For every 1% increase in price, quantity demanded decreases by only 0.12%. This suggests consumers are not very responsive to price changes, often because the good is essential or has few substitutes. Such goods are considered price inelastic.

Question 4

How do you calculate percentage change in quantity demanded?

Accepted Answer

Percentage change in quantity demanded is calculated as (new quantity minus original quantity) divided by original quantity, then multiplied by 100. For instance, if consumption changes from 6 cartons to 5 cartons, the percentage change is (5-6)/6 times 100, which equals -16.67%, representing a decrease in quantity demanded.

Question 5

What does an elasticity value of -0.67 indicate about a consumer's responsiveness to price?

Accepted Answer

An elasticity value of -0.67 indicates moderate price inelasticity. For every 1% increase in price, quantity demanded decreases by 0.67%. This suggests consumers are somewhat responsive to price changes but still view the good as relatively essential. Such products typically have limited close substitutes available.

Question 6

How does the percentage method help compare elasticity across different products?

Accepted Answer

The percentage method standardizes elasticity calculations by converting absolute changes into percentages, allowing fair comparison across products with different units and price ranges. This approach enables economists to determine whether consumers are more responsive to price changes for gasoline versus milk or other goods, regardless of their initial quantities or prices.

Question 7

What is the relationship between price elasticity and consumer demand for essential commodities?

Accepted Answer

Essential commodities typically exhibit low price elasticity because consumers maintain relatively stable consumption levels despite price changes. Families continue purchasing necessary items like milk or gasoline even when prices rise, resulting in negative elasticity coefficients closer to zero, indicating inelastic demand for these necessities.

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