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Why do economists use percentages rather than absolute amounts in measuring the responsiveness of consumers to changes in price? Why do economists use percentages rather than absolute amounts in measuring the responsiveness of consumers to changes in price? Economists use percentages rather than absolute amounts for two different reasons. The first reason for using percentages rather than absolute amounts has to do with the affect a particular amount can have on demand.
The example in our book refers to using dollars or pennies, in one instance the dollar amount dads to a demand that is elastic, however that same dollar amount in pennies would lead one to see that demand is inelastic. The amount is the same, regardless of the currency, therefore the demand should be the same too. This is one reason why economists use percentages. The second reason deals with comparisons. Percentages help us more accurately compare the consumer response to a change, rather than using dollar amounts.
The example in the book illustrates a $1 increase on a very expensive item and a very inexpensive item, although the absolute amount increased is the same, he percentages are at opposite ends of the spectrum 100% and . 01% respectively. 3. How do you interpret the coefficient of the price elasticity of demand? Explain when Deed is 1. 5, 0. 7, and 1. 0. How do you interpret the coefficient of the price elasticity of demand? Explain when Deed is 1. 5, 0. 7, and 1. 0. The coefficient Deed is used to measure elasticity or inelastic of demand. The coefficient can be interpreted by performing an equation.
You will divide the change in demand over the change in price to find Deed. The number you calculate determines the elasticity of demand. It is important to note that all calculations will result in negative numbers, thus one must use the absolute value of their findings to determine elasticity. If your calculation is greater than 1, then demand is elastic. So Deed-I . 5 is elastic. If Deed is less than 1, this represents an inelastic demand , such as Deed=O. 7. There is also a special case where Deed is equal to 1 , this is termed unit elasticity because the change in demand and price are exactly 1 when calculated using the coefficient formula. O, for Deed-??I this represents unit elasticity. 8. The owner of a health club asks you for advice about whether the many should raise or lower the price of its membership this year based on the following information: last year the club raised the price of its membership by 5% and the number of members paying the same fee fell by 7%. Based on the Information provided we could use the price elasticity formula to determine if the price change represented elastic or inelastic demand. Divide the change in quantity by the change in price (0. 07/0. 5) and find the price elasticity coefficient. Using what we have learned about price elasticity, it is clear that Deed-I . 4, which is elastic. Using the table given in example 4. 2, we see that a prince increase on an elastic good results in total revenue decrease. The owner should lower prices to see a total revenue Increase. 1 1 . A gasoline station very near a professional football stadium parks cars on its lot to make money on game days. Last year it charged $4. 00 per car and parked 1000 cars. This year it raised the parking price to $5. 0 and parked 850 cars. Did the station owner make a good economic decision in raising the parking prices from one year to the next? Explain. Did the station owner make a good economic decision in raising the parking rises from one year to the next? If we use the total-revenue test we can easily deduce the answer to this question. We can take the price multiplied by the quantity sold to determine revenue for both years. In the first year the station owner grossed $4. 00 x 1000 cars = $4,000 total revenue. In the second year the owner grossed $5. 0 x 850 cars = $4,250 total revenue. The owner parked less cars for a higher price and still made a profit of $250 over the previous year. Based off of this information it was a good decision. 22. Explain why the following situations would occur in terms of the factors hat affect elasticity. (a) Demand for cellular service is inelastic in the short run, but more elastic in the long run. (b) Demand for a bakery bread is elastic, while demand for bread is inelastic. (c) Demand for personal computers is elastic. A) Demand for cellular service is inelastic in the short run, but more elastic in the long run. This is because in the short run the cellular service could be the only one available to the consumer. Allowing the cellular service to charge a higher price and still see a total revenue decrease. However, in the long run imputation could arise and more companies become cellular service carriers, making the original service elastic and subject to lowering prices in order to gain revenue from additional consumers. (b) Demand for a bakery bread is elastic, while demand for bread is inelastic.
This example can be explained again by looking at what our book defines as elastic and inelastic. Demand for a bakery’s bread is elastic because if the price became too high the demand would drop significantly. Although bread is considered a staple item, there are numerous alternatives to a fresh bakery bread and those alternatives ill more than likely be less than or equal to the price of the bakery product. However, if a grocery store were to increase their bread by say 10 cents, they would see little to no change in the demand because of the relative increase in relation to income. C) Demand for personal computers is elastic. Although in this day and age we use personal computers on a daily basis it is still not a necessity, like milk, water, bread etc. When dealing with a luxury versus a necessity one looks at the price of the item in relation to their income as well as if they will be just as well without it. When talking about personal amputees, you could safely live life without one. There is also major competition over different brands of computers, apple or PC, laptop, desktop or tablet.
These factors contribute to the overall price elasticity of the personal computer in which the demand changes at a higher percentage than the price Of the item. 27. What is the main determinant of the price elasticity of supply? Explain. What is the main determinant of the price elasticity of supply? The main determinant is time, although there are many factors at work when dealing with price elasticity of supply. The supplier needs time and resources to adjust to price changes, and the more quickly the supplier can react the greater the price elasticity.
For example a farmer producing watermelons would be unable, in the short run, to adjust to the new climbing price of bell peppers. Although in the long run, he may be able to re-plow his fields and plant the seeds, this also allows time for any other individual with the means to do so to compete for those peppers higher prices as well. This is why time is the main determinant, even if the farmer had all the resources needed, the amount of time would affect the price elasticity of supply.