Download Examples: Calculating Elasticity

Examples: Calculating Elasticity
Example 1: Consider the market for sales of ice cream cones at a state fair. The
table below gives the market quantity demand, given that all sellers at the fair
charge the same price.
Price of Ice
Cream ($)
0.50
1.00
1.50
2.00
2.50
3.00
Quantity
Demanded
(millions)
16
13
10
7
4
1
You can calculate the market price elasticity of demand using the information
contained in the table. For example, suppose you decide to calculate the price
elasticity of demand at $2.00 by examining a price decrease from $2.00 to $1.50 per
cone. In this case, the demand for ice cream would increase from 7 million cones to
10 million cones. You can use these figures to calculate the price elasticity of demand
as follows:
This implies the following:
The price elasticity of demand for ice cream cones at a price of $2.00, according to
the demand schedule provided, is –1.72.> 1 = Elastic
Example 2: You are a cement producer who has learned some points on your firm's
monthly demand curve.
Price
($ per
ton)
50
40
30
20
10
Quantity
(thousands of
tons)
500
600
700
800
900
You wish to plot your firm's demand curve and find the price elasticity of demand at
various points along the demand curve. You decide to calculate elasticity by
examining the effects of price declines from $50 to $40, $40 to $30, etc.
To calculate the price elasticity of demand between a price of $50 and $40 on the
demand curve, divide the percentage change in quantity demanded by the
percentage change in price.
Similarly, you can find the elasticity between prices of $40 and $30, $30 and $20,
and $20 and $10.
For example, here is what you will find when you calculate elasticity between $40
and $30:
Here is the equation for elasticity between $30 and $20:
And here is the equation for elasticity between $20 and $10:
Notice that demand becomes increasingly less elastic as prices fall. Intuitively, this
makes sense; consumers can be expected to react much more dramatically to a
change in price when prices are high than when they are low. < 1 Inelastic