Question

Calculating the price elasticity of demand - A step-by-step guide

Suppose that during the past year, the price of a laptop computer rose from $2,100 to $2,550. During the same time period, consumer sales decreased from 470,000 to 363,000 laptops.

Calculate the elasticity of demand between these two prices and quantity combinations by using the following steps. After each step, complete the relevant part of the table with the appropriate answers.

Step 1: Fill in the appropriate values for original quantity, new quantity, original price, and new price.

Step 2: Calculate the average quantity by adding the original quantity and the new quantity, and then dividing by two. Do the same for the average price.

Step 3: Calculate the change in quantity by subtracting the original quantity from the new quantity. Do the same for the change in price.

Step 4: Calculate the percentage change in quantity demanded by dividing the change in quantity by the average quantity. Do the same to calculate the percentage change in price.

Step 5: Calculate the price elasticity of demand by dividing the percentage change in quantity demanded by the percentage change in price, ignoring the negative sign.

Using the midpoint method, the elasticity of demand for laptops is about (0.66, 0.75, 1.33,2.65) .

Answer 1

Answer:

1.33

Explanation:

Step 1:

Original quantity = 470,000

New quantity = 363,000

Original price = $2,100

New price = $2,550

Step 2:

Average quantity:

= (Original quantity + New quantity) ÷ 2

= (470,000 + 363,000) ÷ 2

= 833,000 ÷ 2

= 416,500

Average price:

= (Original price + New price) ÷ 2

= ($2,100 + $2,550) ÷ 2

= $4,650 ÷ 2

= 2,325

Step 3:

change in quantity = new quantity - original quantity

                               = 363,000 - 470,000

                               = (107,000)

change in price = new price - original price

                          = $2,550 - $2,100

                          = $450

Step 4:

percentage change in quantity demanded:

= change in quantity ÷ average quantity

= (107,000) ÷ 416,500

= 0.2569 or (25.69%)

percentage change in price:

= change in price ÷ average price

= $450 ÷ 2,325

= 0.1935 or 19.35%

Step 5:

Price elasticity of demand:

= percentage change in quantity demanded ÷ percentage change in price

= 25.69 ÷ 19.35

= 1.327 or 1.33 (approx)