You are given market data that says when the price of pizza...

You are given market data that says when the price of pizza is $4, the quantity demanded of pizza is 60 slices and the quantity demanded of cheese bread is 100 pieces. When the price of pizza is $2, the quantity demanded of pizza is 80 slices and the quantity demanded of cheese bread is 70 pieces. a) Can the elasticity of demand be calculated for either good? b) If so, calculate the elasticity of demand.

Transcript

00:01 So here we've got some classic elasticity questions, right? and remember that elasticity is how quantity demanded responds to a percentage change in price, right? that is literally the definition of elasticity, the percentage change in price, relative to the percentage change in quantity demanded, that price change induces.

00:19 So we need information about quantity demanded and price, and luckily we have exactly that, right? quantity demand is going from 60 to 80 the price is going from four to two right notice these goes in opposite direction so the percentage change in quantity demand is equal to 80 minus 60 over 60 which is equal to one over three the percentage change in price would be equal to two minus four over four, which is equal to negative a half.

01:00 So the elasticity would be a third over negative a half, which is equal to negative two over three, or if you prefer, negative 0 .6667.

01:12 This might not be the answer your instructor is looking for because sometimes these are calculated using the midpoint change, right? when you look at these here, you see that the midpoint is 70 and the midpoint is three.

01:25 So when you're calculating the elasticity, you instead use the midpoint on the bottom of the percentage change.

01:34 And the idea of this is to sort of have like a neutral percentage change, where the percentage change does not depend on the initial frame of reference like a percentage change normally does.

01:46 So if you have a midpoint elasticity, the percentage change in quantity demanded would actually be 80 minus 60 over 6.

01:55 Which is equal to 2 over 7.

02:00 The percentage change in the price would be equal to 2 minus 4 over 3, which would be minus the third, and the elasticity e would be equal to 2 over 7 over 1 over 3.

02:15 Now that is equal to, oh, sorry, and this should be a negative, right? negative.

02:21 And that would give you negative 6 over 7, which is equal to negative.

02:25 Of 0 .8333...

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