Working out Elasticities

Please note corrections Tut Ex 4

· Tut Ex 4 incorrectly has hand-in dates as Tuesday. Correct = Thursday 4 march.

· Insert [F to J] q 1.5

· Explain, using a diagram, either how a market demand curve or a market supply curve may be derived.

3.2 DD Curves

Epd contant at all points for perfectly eleastic [epD] = infinity] (vertical) and perfectly inelastic [EpD = 0] (horizontal) linear D curves.

Edp: ‘other’ linear DD curves:

· For all other linear D curves epD varies along the line.

eDP = %(change)D

%(change)P

To work out percentage change:

(units change) X 100

(average units)

NB: THIS SHIT IS IMPORTANT!!!

Calculating average (arc) epD

Epd = av% (change)Qd

av% (change)P

= [(change)Qd/av Q]. 100

[(change)P/av P].100

=[(q0-q1)/(q0+q1)/2].100

[(p0-p1)/(p0+p1)/2].100

simplify:

=(q0-q1)/(q0+q1)

(p0+p0)/(p0+p1)

Av (arc) elasticity: example to do

Original P = R16; new = R14 | 2/15 = 13%

Oringinal ! = 110; new = 130 20/120 = 16%