Theory question 101
ElasticitySection A: answer one question only from this section.
(a) What is meant by price elasticity of demand?
(b) The following figures are extracted from a schedule of demand and supply.
Price: N9.00, N10.00, N11.00
Quantity demanded: 1,050, 1,000, 950
Quantity supplied: 850, 1,000, 1,150
(i) Calculate the elasticity of demand when price rises from N10.00 to N11.00
(ii) State whether the demand in (i) above is elastic or inelastic
(iii) Calculate the elasticity of supply when price falls from N10.00 to N9.00
(iv) State whether the supply in (iii) above is elastic or inelastic.
Show the model answer
(a) Price elasticity of demand is the degree of responsiveness of quantity demanded to a change in the price of the commodity
It is measured as percentage change in quantity demanded ÷ percentage change in price
(b)(i) % change in Qd = (950 − 1,000)/1,000 × 100 = −5%; % change in P = (11 − 10)/10 × 100 = 10%
Ed = 5% ÷ 10% = 0.5 (ignoring the minus sign)
(ii) Ed is less than 1, so demand is inelastic
(iii) % change in Qs = (850 − 1,000)/1,000 × 100 = −15%; % change in P = (9 − 10)/10 × 100 = −10%
Es = 15% ÷ 10% = 1.5
(iv) Es is greater than 1, so supply is elastic
Always divide the percentage change in quantity by the percentage change in price, using the starting values as the base.