Econ 1103 Principles of Economics Learning Activity 2

Calculating and interpreting elasticity

Think

Elasticity is measure of sensitivity of demand or supply to a change in one of its determinants. When we examine price elasticity, we are answering the question: how sensitive are consumers to a change in the price of the product, holding all else constant? Elasticity can be used to answer questions about revenue ad production. It can also help to make prediction about consumer responses to price changes when no data is available at a given price level.

Instructions:

A friend of yours owns a small manufacturing firm that produces a high-quality steam iron that is sold globally. Last month her sales manager and the sales engineer had a major disagreement about raising the price of the steam irons. Currently the price of the steam iron is $145. She had the finance/marketing department compile the following sales data. She is hoping that you would help with settling the dispute based on clear economic thinking. Use the correct price points to evaluate whether she should raise the price of her steam irons.

Price of steam iron	Per capita Income	Price of Substitute	Quantity of steam irons (per quarter)
$145	$150,000	$135	1700
160	167,000	145	1900
160	150, 000	135	1200
175	150,000	140	1200

1. Calculate the price elasticity of demand coefficient in the space below using the mid-point formula. Show your work. Remember "ceteris paribus" and use the correct data points.

1. Is the demand for this product elastic, inelastic, or unit elastic? How do you know?

1. Explain one determinant of demand elasticity. (It does not need to relate to irons).