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Microeconomics BADM204
Worksheet on Elasticity 2
This worksheet looks at the measure of price elasticity of demand; how to measure it, what
determines its value and what value it is to companies as a measure. To cover the worksheet
fully, you should have a sound knowledge of the principles underlying supply, demand and the
determination of price in a market.
Step 1 - E L A S T I C or INELASTIC?
Price Elasticity of Demand is a measure of how responsive demand is to a change in price. If a
price change leads to a considerably bigger change in quantity demanded, we would consider the
good to be responsive to a price change: hence elastic. If, however, a similar price change leads
to a much smaller change in demand, we would consider it inelastic.
To get a more precise measure than this of the responsiveness to a price change we can
calculate a value for price elasticity of demand. We use the formula:
PRICE ELASTICITY OF DEMAND =
percentage change in demand
percentage change in price
N.B. There are other alternative formulae and measures of elasticity that you may want to
investigate in your textbook or library, but we shall use this measure throughout this worksheet.
Use the formula above to calculate values of Price Elasticity for all the situations below:
Price
Quantity
% change in quantity
demanded
% change in
price
Initial
New
Initial
New
25
30
100
40
40
70
120
90
200
220
80
64
50
75
150
135
In each case identify whether you would describe it as elastic / unit elastic / inelastic. Briefly
show numerically why. E.g. Value is between 0 and 1, etc
1. ________________________________________________________
2. _________________________________________________________
3. _________________________________________________________
4. _________________________________________________________
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Microeconomics BADM204
Step 2 - E L A S T I C MONEY?
Different elasticity values will lead to different effects on the level of total revenue a firm receives.
For example, if a good is elastic and a firm increases the price, by say 10%, they will lose more
than 10% of their business, and so although they are getting more money for each one they sell,
they are selling far fewer.
To see the effect that elasticity has on total revenue fill in the table below:
Price
Quantity
Revenue
Price Elasticity of
Demand
Initial
New
Initial
New
Before price
change
After price
change
25
30
100
40
1. ___________
40
70
120
90
2. ___________
200
220
80
64
3. ___________
50
75
150
135
4. ___________
Has revenue increased or decreased in each case?
1. _________________________
2. _________________________
3. _________________________
4. _________________________
In the table below put a tick in the box that associates the appropriate elasticity value with the
appropriate effect on total revenue when price rises (as in the above examples):
Elasticity value
Elastic
Inelastic
Unit elastic
Effect on total revenue
*****
*****
*****
Increase
Decrease
Stay same
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Microeconomics BADM204
Step 3 - What determines E L A S T I C I T Y?
As we have seen above it is important to a company to have an idea of the value of the elasticity
of demand of its good or service as it will affect what happens to their total revenue as price
changes. What should the company aim to do with their price in each of the circumstances
below?
Elasticity
Change in price to increase total revenue??
(Increase or decrease price?)
Elastic
Inelastic
Unit elastic
If the company want to estimate the value of the price elasticity of their product, then they need to
judge it against the following criteria:
Proportion of income spent on the good - the lower the proportion of income spent,
the more inelastic the good will tend to be
The number of substitutes - the more substitutes a good has the easier it is for
consumers to switch to another product if the price goes up
The strength of the brand - the stronger the brand, the more inelastic the product will be
The level of necessity or addiction - the more necessary or addictive something is, the
more inelastic it will be
Judge the products in the table below to decide whether you think they will be elastic or inelastic:
Product
Elastic or inelastic?
Reasons?
A box of matches
A luxury holiday
'Heinz' baked beans
Computers - home users
Computers - business users
Cigarettes
Elastic bands
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Microeconomics BADM204

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Microeconomics BADM204 Worksheet on Elasticity 2 This worksheet looks at the measure of price elasticity of demand; how to measure it, what determines its value and what value it is to companies as a measure. To cover the worksheet fully, you should have a sound knowledge of the principles underlying supply, demand and the determination of price in a market. Step 1 - E L A S T I C or INELASTIC? Price Elasticity of Demand is a measure of how responsive demand is to a change in price. If a price change leads to a considerably bigger change in quantity demanded, we would consider the good to be responsive to a price change: hence elastic. If, however, a similar price change leads to a much smaller change in demand, we would consider it inelastic. To get a more precise measure than this of the responsiveness to a price change we can calculate a value for price elasticity of demand. We use the formula: PRICE ELASTICITY OF DEMAND = percentage change in demand percentage change in price N.B. There are other alternative formulae and measures of elasticity that you may want to investigate in your textbook or library, but we shall use this measure throughout this worksheet. Use the formula above to calculate values of Price Elasticity for all the situations below: Price Quantity Initial New Initial New % change in quantity demanded % change in price Price Elasticity of Demand 25 30 100 40 1. ___________ 40 70 120 90 2. ___________ 200 220 80 64 3. ___________ 50 75 150 135 4. ___________ In each case identify whether you would describe it as elastic / unit elastic / inelastic. Briefly show numerically why. E.g. Value is between 0 and 1, etc 1. ________________________________________________________ 2. _________________________________________________________ 3. _________________________________________________________ 4. _________________________________________________________ Microeconomics BADM204 Step 2 - E L A S T I C MONEY? Different elasticity values will lead to different effects on the level of total revenue a firm receives. For example, if a good is elastic and a firm increases the price, by say 10%, they will lose more than 10% of their business, and so although they are getting more money for each one they sell, they are selling far fewer. To see the effect that elasticity has on total revenue fill in the table below: Price Quantity Initial New Initial New Revenue Before price change After price change Price Elasticity of Demand 25 30 100 40 1. ___________ 40 70 120 90 2. ___________ 200 220 80 64 3. ___________ 50 75 150 135 4. ___________ Has revenue increased or decreased in each case? 1. _________________________ 2. _________________________ 3. _________________________ 4. _________________________ In the table below put a tick in the box that associates the appropriate elasticity value with the appropriate effect on total revenue when price rises (as in the above examples): Elasticity value Elastic Inelastic Unit elastic Effect on total revenue ***** ***** ***** Increase Decrease Stay same Microeconomics BADM204 Step 3 - What determines E L A S T I C I T Y? As we have seen above it is important to a company to have an idea of the value of the elasticity of demand of its good or service as it will affect what happens to their total revenue as price changes. What should the company aim to do with their price in each of the circumstances below? Elasticity Change in price to increase total revenue?? (Increase or decrease price?) Elastic Inelastic Unit elastic If the company want to estimate the value of the price elasticity of their product, then they need to judge it against the following criteria: • Proportion of income spent on the good - the lower the proportion of income spent, the more inelastic the good will tend to be • The number of substitutes - the more substitutes a good has the easier it is for consumers to switch to another product if the price goes up The strength of the brand - the stronger the brand, the more inelastic the product will be The level of necessity or addiction - the more necessary or addictive something is, the more inelastic it will be • • Judge the products in the table below to decide whether you think they will be elastic or inelastic: Product A box of matches A luxury holiday 'Heinz' baked beans Computers - home users Computers - business users Cigarettes Elastic bands Elastic or inelastic? Reasons? Microeconomics BADM204 Name: Description: ...
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