# Price Elasticity

Submitted By jczscott
Words 957
Pages 4
John Scott
ECON212: Principles of Microeconomics
December 1, 2013
Phase 2 Individual Project
Professor Reddy Urimindi

The Price Elasticity of Demand is used to measure how the rate of response of quantity demanded changes due to a price increase or decrease. The formula used to compute the Price Elasticity of Demand (PEoD) is:
PEoD = (% Change in Quantity Demanded) / (% Change in Price).
To calculate the % change in quantity demanded, we use the formula:
QDemand(NEW) - QDemand(OLD) / QDemand(OLD)
To calculate the % change in price, we use the formula:
Price(NEW) - Price(OLD) / Price(OLD) Elastic goods are sensitive to prices because an increase in price will have a greater influence on demand for that good. Inelastic goods are goods that not very price sensitive and price changes have little influence on their demand. Examples of ineleastic goods are bread, milk, and fuel. These are considered necessities of life and consumer will still buy them regardless of price fluctuations. The higher the price elasticity, the more sensitive consumers are to price changes. A good with a high price elasticity would suggest that when the price of that good goes up, consumers will buy a lot less of it which increases the supply, and when the price of that same good goes down, consumers will buy a lot more of it and decrease the supply. A good with a low price elasticity would mean just the opposite, that changes in price will have little influence on demand. Example 1. The price of a laptop increases by 20% and there is a 40% drop in the quantity demanded.
We can use the above formula and get (-40%) / (20%) = -2. In price elasticity the negative sign is ignored when analyzing it, so price elasticity will always remain a positive value. Since the price elasticity is 2, the good becomes elastic, meaning that the good is very sensitive to price...

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