ANSWER NO5(a)

Price elasticity of demand

The responsiveness of the quantity demanded to a change in price, measured by

dividing the percentage change in the quantity demanded of a product by the
percentage change in the product’s price.

Price elasticity of demand = Percentage change in quantity demanded/ Percentage

change in price

PED = %∆ Q.D/%∆P

If the quantity demanded is responsive to changes in price, the percentage change in

quantity demanded will be greater than the percentage change in price, and the price
elasticity of demand will be greater than 1 in absolute value. In this case, demand is
elastic.

For example,

if a 10 percent decrease in the price of bagels results in a 20 percent increase in the

quantity of bagels demanded, then:

Price elasticity demand = 20%/-10% = -2

Slope of a demand curve is different from price elasticity demand

The price elasticity of demand is not the same as the slope of the demand
curve.Elasticity is not the same thing as the slope of the demand curve, but a for linear
demand curves, steeper demand curves are more elastic.

If we calculate the price elasticity of demand for a price cut, the percentage change in
price will be negative, and the percentage change in quantity demanded will be positive.
Similarly, if we calculate the price elasticity of demand for a price increase, the
percentage change in price will be positive ,and the percentage change in quantity
demanded will be negative. Therefore, the price elasticity of demand is always negative.
Therefore the slope of demand curve is different from the slope of price elasticity
demand.
Elasticity varies along the demand curve

More elastic

Less elastic

Midpoint formula for calculating PED

We can use the midpoint formula to calculate one value of the price elasticity of
demand between the same two points on a demand curve. The midpoint formula uses
the average of the initial and final quantities and the initial and final prices. If Q1 and P1
are the initial quantity and price and Q2 and P2 are the final quantity and price, the
midpoint formula is:

Advantage of using midpoint method

The midpoint formula may seem challenging at first, but the numerator is just the
change in quantity divided by the average of the initial and final quantities, and the
denominator is just the change in price divided by the average of the initial and final
prices.

It avoids the problem to getting a different answer when we compute price elasticity
between ant of two points on demand curve and it calculate by dividing the change in
variable by the midpoint value of the two points on the curve instead of the starting
point on the curve.

AMSWER NO 5(b)

Change in demand Change in quantity demand

Something other than the price of the A change in the price of a good leads to a
good in question leads to a change in change in the quantity of that good
demand. demanded.