Calculating Elasticity Worksheet

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 Midpoint formula:

Use the formula above to calculate values of Price Elasticity for all the situations below:

Price

Quantity

% change in quantity demanded

% change in price

Elasticity of Demand

Initial

New

Initial

New

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 / unitary elastic / inelastic

1. _________________________2. _________________________

3. _________________________4. _________________________

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

210

80

64

3. ___________

50

75

150

135

4. ___________

Has revenue increased or decreased in each case?

1. _________________________2. _________________________

3. _________________________4. _________________________

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 vacation

'Heinz' Ketchup

Computers - home users

Computers - business users

Cigarettes

Rubber bands

Step 4 - Using Elasticity to predict changes in quantity

The concept of elasticity is a very useful tool in economic analysis. If we know the elasticity of a particular product, we can quantify the law of demand, predicting the change in quantity resulting from a change in price. This concept as we have seen allows suppliers to make decisions about price changes and total revenue, but it can also affect broader decisions affecting all of society. Consider each of the following examples, answering each using your knowledge of Elasticity.

1.)We can predict the effects of a change in the price of beer on drinking and highway deaths among young adults. In a 1993 study Henry Saffer and Michael Grossman discovered that the price elasticity of demand for beer among young adults is about 1.30. If a state were to impose a beer tax that increases the price of beer by 10%, we can predict that beer consumption will decrease by 13%

(% change in quantity demanded = % change in price X Elasticity of demand)

So, 10% X 1.30 = 13%

Saffer and Grossman also discovered that the number of highway deaths among young adults is roughly proportional to their beer consumption. So, with a 13% decrease in beer consumption they saw a 13% decrease in fatalities caused by alcohol.

The group Mothers Against Drunk Driving (M.A.D.D.) has set a goal of reducing the number of highway deaths among young adults by 39%. Based on what we know from above, how much would the price of beer need to be increased to meet this goal?

2.)A 1997 study by Michael Phillips and Suein Hwang discovered that the demand for cigarettes among teens is elastic, with an elasticity of 1.3. Therefore, a 25% increase in the price would reduce smoking by 32.5% (25% X 1.30 = 32.5%). One of the stated objectives of the federal Tobacco Agreement of 1997 was to reduce teenage smoking by 60%. What % increase in the price of cigarettes would be needed to achieve this target?

3.)As a transit planner your job is to predict ridership and total fare revenue. Suppose the short-run elasticity of demand for commuter rail (over a one month period) is .60, and the long-run elasticity (over a 2 year perioCalculating Elasticity Worksheet

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 Midpoint formula:

Use the formula above to calculate values of Price Elasticity for all the situations below:

Price

Quantity

% change in quantity demanded

% change in price

Elasticity of Demand

Initial

New

Initial

New

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 / unitary elastic / inelastic

1. _________________________2. _________________________

3. _________________________4. _________________________

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

210

80

64

3. ___________

50

75

150

135

4. ___________

Has revenue increased or decreased in each case?

1. _________________________2. _________________________

3. _________________________4. _________________________

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 vacation

'Heinz' Ketchup

Computers - home users

Computers - business users

Cigarettes

Rubber bands

Step 4 - Using Elasticity to predict changes in quantity

The concept of elasticity is a very useful tool in economic analysis. If we know the elasticity of a particular product, we can quantify the law of demand, predicting the change in quantity resulting from a change in price. This concept as we have seen allows suppliers to make decisions about price changes and total revenue, but it can also affect broader decisions affecting all of society. Consider each of the following examples, answering each using your knowledge of Elasticity.

1.)We can predict the effects of a change in the price of beer on drinking and highway deaths among young adults. In a 1993 study Henry Saffer and Michael Grossman discovered that the price elasticity of demand for beer among young adults is about 1.30. If a state were to impose a beer tax that increases the price of beer by 10%, we can predict that beer consumption will decrease by 13%

(% change in quantity demanded = % change in price X Elasticity of demand)

So, 10% X 1.30 = 13%

Saffer and Grossman also discovered that the number of highway deaths among young adults is roughly proportional to their beer consumption. So, with a 13% decrease in beer consumption they saw a 13% decrease in fatalities caused by alcohol.

The group Mothers Against Drunk Driving (M.A.D.D.) has set a goal of reducing the number of highway deaths among young adults by 39%. Based on what we know from above, how much would the price of beer need to be increased to meet this goal?

2.)A 1997 study by Michael Phillips and Suein Hwang discovered that the demand for cigarettes among teens is elastic, with an elasticity of 1.3. Therefore, a 25% increase in the price would reduce smoking by 32.5% (25% X 1.30 = 32.5%). One of the stated objectives of the federal Tobacco Agreement of 1997 was to reduce teenage smoking by 60%. What % increase in the price of cigarettes would be needed to achieve this target?

3.)As a transit planner your job is to predict ridership and total fare revenue. Suppose the short-run elasticity of demand for commuter rail (over a one month period) is .60, and the long-run elasticity (over a 2 year period) is 1.60. The current ridership is 100,000 people per day. Suppose that the transit authority decides to increase its fares from $2.00 to $2.20.

a.Predict the changes in train ridership over a one month period (the short run) and a 2 year period (the long run).

b.Over the one-month period, will total fare revenue increase or decrease? What about over a 2 year period?d) is 1.60. The current ridership is 100,000 people per day. Suppose that the transit authority decides to increase its fares from $2.00 to $2.20.

a.Predict the changes in train ridership over a one month period (the short run) and a 2 year period (the long run).

b.Over the one-month period, will total fare revenue increase or decrease? What about over a 2 year period?