Transatlantic air travel in business class has an estimated elasticity of demand of 0.40 less than transatlantic air travel in economy class, with an estimated price elasticity of 0.62. Why do you think this is the case? For me, I feel that it is because business flights has a higher degree of necessity as compared to economy flights meant for leisure. As such, a change in airfare prices for business flights wouldn't impact much of the quantity demanded due to its higher indispensability.

I would say that it is simply because business class travelers care less about the price, given that they are already not buying the cheapest option.

Hey for the first set of elasticity, from going to G to H it says the % change in price is 7.81 but when I divide 10 by 125 I get 0.08 which is 8%, so am I doing it wrong or is the answer wrong?

You're right. It's supposed to be 8%. The answer is wrong.

What is the answer to critical question No.1

The change in price has a less impact on preferences of the people with higher incomes, who prefer the business class. The price is not the most important criterion for these people, that is why any given percentage change in price will cause a smaller percentage change in quantity demanded. The influence of the change in price is bigger for the people with less incomes, who prefer the economy class. This statistic shows us that the price has a remarkable significance for these people, because their purchasing power is less than people in business class, that is why the price should be a more important criterion for them. Additionally, despite the wage gap between the consumers the demand curve is inelastic for both classes in Transatlantic Air Travel.

to find the price elasticity of the entire demand curve, is it correct to find the elasticity for all points and find the average of those values?

No, there is no such thing as a price elasticity of the entire curve. The price elasticity is different for every point.

I'm confused on problem 2. Since the problem Already gave me the price I thought all I had to do was find the quantity demanded. So I rewrote the equation as 2P=Q. But with that I end up with an equation of a supply curve then a demand. Please help!

P = 2/Q cannot be re-written as 2P = Q. That's incorrect algebra.

Are there answers to the problems?

The answers to the self-check questions are below the questions. The answers to the other questions aren't given.

could someone please give the answers to the problems?

Here's my answers to the problems: (1) E = |(1/5.5)/(-3/31.5)| = 1.91 Thus the demand curve is elastic here. (2) E1 = |(0.1/0.45)/(-1/4.5)| = 1 E2 = | [(1/36)/(17/72)]/(-1/8.5) | = 1 The demand curve at the two points are both unit elastic. In fact, the elasticity of price at *every point* of the curve equals to *1*. Since P always equals to 2/Q on this curve, ΔP = P(new) - P(old) = 2/Q(new) - 2/Q(old) = 2(Q(old) - Q(new))/Q(new)*Q(old) = 2ΔQ/[Q(new)*Q(old)]; similarly, P(average) = (Q(new) + Q(old)) / Q(new)*Q(old). Thus we get %ΔP = 2ΔQ/(Q(new) + Q(old)) and plug it into the formula E = %ΔQ/%ΔP, we get E = (ΔQ * (Q(new) + Q(old))) / (0.5 * (Q(new) + Q(old)) * 2ΔQ) = 1. (3) The method is the same as above. E1 = E2 = 1. (4) E = 0.41 Hope it helps! :)

Main content

Price elasticity of demand and price elasticity of supply

Google Classroom

How do quantities supplied and demanded react to changes in price?

Key points

Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It is computed as the percentage change in quantity demanded—or supplied—divided by the percentage change in price.
Elasticity can be described as elastic—or very responsive—unit elastic, or inelastic—not very responsive.
Elastic demand or supply curves indicate that the quantity demanded or supplied responds to price changes in a greater than proportional manner.
An inelastic demand or supply curve is one where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied.
Unitary elasticity means that a given percentage change in price leads to an equal percentage change in quantity demanded or supplied.

What is price elasticity?

Both demand and supply curves show the relationship between price and the number of units demanded or supplied. Price elasticity is the ratio between the percentage change in the quantity demanded,

Q_{d}

, or supplied,

Q_{s}

, and the corresponding percent change in price.

The price elasticity of demand is the percentage change in the quantity demanded of a good or service divided by the percentage change in the price. The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price.

Elasticities can be usefully divided into five broad categories: perfectly elastic, elastic, perfectly inelastic, inelastic, and unitary. An elastic demand or elastic supply is one in which the elasticity is greater than one, indicating a high responsiveness to changes in price. An inelastic demand or inelastic supply is one in which elasticity is less than one, indicating low responsiveness to price changes. Unitary elasticities indicate proportional responsiveness of either demand or supply.

Perfectly elastic and perfectly inelastic refer to the two extremes of elasticity. Perfectly elastic means the response to price is complete and infinite: a change in price results in the quantity falling to zero. Perfectly inelastic means that there is no change in quantity at all when price changes.

If . . .	It Is Called . . .
$\frac{% change in quantity}{% change in price} = \infty$ ‍	Perfectly elasti
$\frac{% change in quantity}{% change in price} > 1$ ‍	Elastic
$\frac{% change in quantity}{% change in price} = 1$ ‍	Unitary
$\frac{% change in quantity}{% change in price} < 1$ ‍	Inelastic
$\frac{% change in quantity}{% change in price} = 0$ ‍	Perfectly inelastic

Using the midpoint method to calculate elasticity

To calculate elasticity, instead of using simple percentage changes in quantity and price, economists sometimes use the average percent change in both quantity and price. This is called the Midpoint Method for Elasticity:

Midpoint method for elasticity = \frac{\frac{Q_{2} - Q_{1}}{(\frac{Q_{2} + Q_{1}}{2})}}{\frac{P_{2} - P_{1}}{(\frac{P_{2} + P_{1}}{2})}}

The advantage of the midpoint method is that we get the same elasticity between two price points whether there is a price increase or decrease. This is because the formula uses the same base for both cases. The midpoint method is referred to as the arc elasticity in some textbooks.

Using the point elasticity of demand to calculate elasticity

A drawback of the midpoint method is that as the two points get farther apart, the elasticity value loses its meaning. For this reason, some economists prefer to use the point elasticity method. In this method, you need to know what values represent the initial values and what values represent the new values.

Point elasticity = \frac{\frac{new Q - initial Q}{initial Q}}{\frac{initial P - new P}{initial P}}

Calculating price elasticity of demand

Let’s apply these formulas to a practice scenario. We'll calculate the elasticity between points

A

and

B

in the graph below.

First, apply the formula to calculate the elasticity as price decreases from $70 at point

B

to $60 at point

A

\begin{array}{ccc} % change in quantity & = & \frac{3, 000 - 2, 800}{(3, 000 + 2, 800) / 2} \times 100 \\ = & \frac{200}{2, 900} \times 100 \\ = & 6.9 \\ % change in price & = & \frac{60 - 70}{(60 + 70) / 2} \times 100 \\ = & \frac{- 10}{65} \times 100 \\ = & - 15.4 \\ Price elasticity of demand & = & \frac{6.9 %}{- 15.4 %} \\ = & 0.45 \end{array}

The elasticity of demand between point

A

and point

B

\frac{6.9 %}{- 15.4 %}

, or 0.45. Because this amount is smaller than one, we know that the demand is inelastic in this interval.

[Wait a minute! Shouldn't the price elasticity of demand be negative here?]

This means that, along the demand curve between point

B

and point

A

, if the price changes by 1%, the quantity demanded will change by 0.45%. A change in the price will result in a smaller percentage change in the quantity demanded. For example, a 10% increase in the price will result in only a 4.5% decrease in quantity demanded. A 10% decrease in the price will result in only a 4.5% increase in the quantity demanded.

[I'd like to do another practice problem.]

Calculating the price elasticity of supply

Now let's try calculating the price elasticity of supply. We use the same formula as we did for price elasticity of demand:

\begin{array}{ccc} Price elasticity of supply & = & \frac{% change in quantity}{% change in price} \end{array}

Assume that an apartment rents for $650 per month and, at that price, 10,000 units are rented—you can see these number represented graphically below. When the price increases to $700 per month, 13,000 units are supplied into the market.

By what percentage does apartment supply increase? What is the price sensitivity?

We'll start by using the Midpoint Method to calculate percentage change in price and quantity:

\begin{array}{ccc} % change in quantity & = & \frac{13, 000 - 10, 000}{(13, 000 + 10, 000) / 2} \times 100 \\ = & \frac{3, 000}{11, 500} \times 100 \\ = & 26.1 \\ % change in price & = & \frac{$ 700 - $ 650}{($ 700 + $ 650) / 2} \times 100 \\ = & \frac{50}{675} \times 100 \\ = & 7.4 \end{array}

Next, we take the results of our calculations and plug them into the formula for price elasticity of supply:

\begin{array}{ccc} Price elasticity of supply & = & \frac{% change in quantity}{% change in price} \\ = & \frac{26.1}{7.4} \\ = & 3.53 \end{array}

Again, as with the elasticity of demand, the elasticity of supply is not followed by any units. Elasticity is a ratio of one percentage change to another percentage change—nothing more. It is read as an absolute value. In this case, a 1% rise in price causes an increase in quantity supplied of 3.5%. The greater than one elasticity of supply means that the percentage change in quantity supplied will be greater than a one percent price change.

[Hang on! This sounds familiar. Is the elasticity the slope?]

Summary

Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It is computed as the percentage change in quantity demanded—or supplied—divided by the percentage change in price.
Elasticity can be described as elastic—or very responsive—unit elastic, or inelastic—not very responsive.
Elastic demand or supply curves indicate that the quantity demanded or supplied responds to price changes in a greater than proportional manner.
An inelastic demand or supply curve is one where a given percentage change in price will cause a smaller percentage change in quantity demanded or supplied.
Unitary elasticity means that a given percentage change in price leads to an equal percentage change in quantity demanded or supplied.

Self-check questions

Using the data shown in the table below about demand for smart phones, calculate the price elasticity of demand from point

B

to point

C

, point

D

to point

E

, and point

G

to point

H

. Classify the elasticity at each point as elastic, inelastic, or unit elastic.

Points	P	Q
A	60	3,000
B	70	2,800
C	80	2,600
D	90	2,400
E	100	2,200
F	110	2,000
G	120	1,800
H	130	1,600

[Show solution.]

Using the data shown in in the table below about supply of alarm clocks, calculate the price elasticity of supply from: point

J

to point

K

, point

L

to point

M

, and point

N

to point

P

. Classify the elasticity at each point as elastic, inelastic, or unit elastic.

Point	Price	Quantity Supplied
J	$8	50
K	$9	70
L	$10	80
M	$11	88
N	$12	95
P	$13	100

[Show solution.]

Review Questions

What is the formula for calculating elasticity?
What is the price elasticity of demand? Can you explain it in your own words?
What is the price elasticity of supply? Can you explain it in your own words?

Critical-thinking questions

Transatlantic air travel in business class has an estimated elasticity of demand of 0.40 less than transatlantic air travel in economy class, which has an estimated price elasticity of 0.62. Why do you think this is the case?
What is the relationship between price elasticity and position on the demand curve? For example, as you move up the demand curve to higher prices and lower quantities, what happens to the measured elasticity? How would you explain that?

Problems

The equation for a demand curve is $P = 48 - 3 Q$ ‍. What is the elasticity in moving from a quantity of 5 to a quantity of 6?
The equation for a demand curve is $P = 2 / Q$ ‍. What is the elasticity of demand as price falls from 5 to 4? What is the elasticity of demand as the price falls from 9 to 8? Would you expect these answers to be the same?
The equation for a supply curve is $4 P = Q$ ‍. What is the elasticity of supply as price rises from 3 to 4? What is the elasticity of supply as the price rises from 7 to 8? Would you expect these answers to be the same?
The equation for a supply curve is $P = 3 Q - 8$ ‍. What is the elasticity in moving from a price of 4 to a price of 7?

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Jm-punk
Posted 7 years ago. Direct link to Jm-punk's post “Transatlantic air travel ...”
Transatlantic air travel in business class has an estimated elasticity of demand of 0.40 less than transatlantic air travel in economy class, with an estimated price elasticity of 0.62. Why do you think this is the case? For me, I feel that it is because business flights has a higher degree of necessity as compared to economy flights meant for leisure. As such, a change in airfare prices for business flights wouldn't impact much of the quantity demanded due to its higher indispensability.
Button navigates to signup pageComment on Jm-punk's post “Transatlantic air travel ...”
(11 votes)
Answer
- Tejas
  Posted 6 years ago. Direct link to Tejas's post “I would say that it is si...”
  I would say that it is simply because business class travelers care less about the price, given that they are already not buying the cheapest option.
  Button navigates to signup page
  (33 votes)
Nitigya Golait
Posted 7 years ago. Direct link to Nitigya Golait's post “What is the answer to cri...”
What is the answer to critical question No.1
Button navigates to signup pageButton navigates to signup page
(5 votes)
Answer
- Savaş Can Akçay
  Posted 7 years ago. Direct link to Savaş Can Akçay's post “The change in price has a...”
  The change in price has a less impact on preferences of the people with higher incomes, who prefer the business class. The price is not the most important criterion for these people, that is why any given percentage change in price will cause a smaller percentage change in quantity demanded.
  The influence of the change in price is bigger for the people with less incomes, who prefer the economy class. This statistic shows us that the price has a remarkable significance for these people, because their purchasing power is less than people in business class, that is why the price should be a more important criterion for them. Additionally, despite the wage gap between the consumers the demand curve is inelastic for both classes in Transatlantic Air Travel.
  Comment on Savaş Can Akçay's post “The change in price has a...”
  (17 votes)
Fayez Khan
Posted 7 years ago. Direct link to Fayez Khan's post “Hey for the first set of ...”
Hey for the first set of elasticity, from going to G to H it says the % change in price is 7.81 but when I divide 10 by 125 I get 0.08 which is 8%, so am I doing it wrong or is the answer wrong?
Button navigates to signup pageComment on Fayez Khan's post “Hey for the first set of ...”
(7 votes)
Answer
- Stefan van der Waal
  Posted 7 years ago. Direct link to Stefan van der Waal's post “You're right. It's suppos...”
  You're right. It's supposed to be 8%. The answer is wrong.
  Button navigates to signup page
  (5 votes)
muhammad.alenzy
Posted 7 years ago. Direct link to muhammad.alenzy's post “to find the price elastic...”
to find the price elasticity of the entire demand curve, is it correct to find the elasticity for all points and find the average of those values?
Button navigates to signup pageButton navigates to signup page
(3 votes)
Answer
- Stefan van der Waal
  Posted 7 years ago. Direct link to Stefan van der Waal's post “No, there is no such thin...”
  No, there is no such thing as a price elasticity of the entire curve. The price elasticity is different for every point.
  Button navigates to signup page
  (9 votes)
Felix Kaloczy
Posted 7 years ago. Direct link to Felix Kaloczy's post “could someone please give...”
could someone please give the answers to the problems?
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(0 votes)
Answer
- Qi.Z
  Posted 7 years ago. Direct link to Qi.Z's post “Here's my answers to the ...”
  Here's my answers to the problems:
  (1) E = |(1/5.5)/(-3/31.5)| = 1.91 Thus the demand curve is elastic here.
  (2) E1 = |(0.1/0.45)/(-1/4.5)| = 1 E2 = | [(1/36)/(17/72)]/(-1/8.5) | = 1 The demand curve at the two points are both unit elastic. In fact, the elasticity of price at every point of the curve equals to 1. Since P always equals to 2/Q on this curve, ΔP = P(new) - P(old) = 2/Q(new) - 2/Q(old) = 2(Q(old) - Q(new))/Q(new)*Q(old) = 2ΔQ/[Q(new)*Q(old)]; similarly, P(average) = (Q(new) + Q(old)) / Q(new)*Q(old). Thus we get %ΔP = 2ΔQ/(Q(new) + Q(old)) and plug it into the formula E = %ΔQ/%ΔP, we get E = (ΔQ * (Q(new) + Q(old))) / (0.5 * (Q(new) + Q(old)) * 2ΔQ) = 1.
  (3) The method is the same as above. E1 = E2 = 1.
  (4) E = 0.41
  Hope it helps! :)
  Comment on Qi.Z's post “Here's my answers to the ...”
  (7 votes)
Nicolas Eleftheriou
Posted 6 years ago. Direct link to Nicolas Eleftheriou's post “Should i use the absolute...”
Should i use the absolute values for the change of quantity and price if i want to measure elasticity? Because if i don't most of the problems turn out to be inelastic since the Elasticity is smaller than 1. is that correct?
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(2 votes)
Answer
kimiyama_haruhi
Posted 6 years ago. Direct link to kimiyama_haruhi's post “Another question is, what...”
Another question is, what happen if both demand and supply increase, but there is a larger increase in demand than the supply? How would the graph looks like? Pls do help me
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(2 votes)
Answer
Hadorph
Posted 7 years ago. Direct link to Hadorph's post “In the example above (apa...”
In the example above (apartments), when calculating the price elasticity of supply, why do you also split the change in price by two?
According to the example the answer is 7.4 %, shouldn't it be 14.8 % ?
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(2 votes)
Answer
- Adena Daniel
  Posted 7 years ago. Direct link to Adena Daniel's post “Incorrect. He made a wron...”
  Incorrect. He made a wrong input in the y value but did the math correct. It was supposed to be 700-650 not 600.
  Comment on Adena Daniel's post “Incorrect. He made a wron...”
  (1 vote)
More' Fofana
Posted 5 years ago. Direct link to More' Fofana's post “I'm confused on problem 2...”
I'm confused on problem 2. Since the problem Already gave me the price I thought all I had to do was find the quantity demanded. So I rewrote the equation as 2P=Q. But with that I end up with an equation of a supply curve then a demand. Please help!
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(1 vote)
Answer
- Andrew M
  Posted 5 years ago. Direct link to Andrew M's post “P = 2/Q cannot be re-writ...”
  P = 2/Q cannot be re-written as 2P = Q. That's incorrect algebra.
  Comment on Andrew M's post “P = 2/Q cannot be re-writ...”
  (2 votes)
Bobby Hickson
Posted 7 years ago. Direct link to Bobby Hickson's post “Are there answers to the ...”
Are there answers to the problems?
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(1 vote)
Answer
- Stefan van der Waal
  Posted 7 years ago. Direct link to Stefan van der Waal's post “The answers to the self-c...”
  The answers to the self-check questions are below the questions. The answers to the other questions aren't given.
  Button navigates to signup page
  (2 votes)

Microeconomics

Course: Microeconomics > Unit 3

Price elasticity of demand and price elasticity of supply

Key points

What is price elasticity?

Using the midpoint method to calculate elasticity

Using the point elasticity of demand to calculate elasticity

Calculating price elasticity of demand

Calculating the price elasticity of supply

Summary

Self-check questions

Review Questions

Critical-thinking questions

Problems

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