14 Questions
What is the formula for the income elasticity of demand?
Ey = c X
What is the value of Qb in the given example?
55
What is the value of the income elasticity of demand in the example?
+2.2727
What is the cross-price elasticity of demand for bubblegum with respect to chips?
-0.3636
What is the formula for cross-price elasticity of demand?
Ec = e X
What is the price of bubblegum per pack in the example?
R5
What is the annual household income in the example?
R25 000
What is the formula for the demand function in the example?
Qb = 100 –30Pb – 20Pc + 0.005I
What is the formula for a straight line demand curve?
Qd = a - bP
What does the intercept 'a' represent in the formula for a straight line demand curve?
The point of intersection on the y-axis
What is the formula to calculate the point elasticity of demand?
-b (P/Q)
What is the value of the equilibrium price of petrol in the given example?
3
What is the value of the equilibrium quantity of petrol in the given example?
50 000
What is the meaning of the slope of a straight line demand curve?
The change in quantity with respect to price
Study Notes
Algebra for Elasticity
- Formula for a straight line: y = mx + c
- Formula for a straight line demand curve: P = -aQ + b or Qd = a - bP
- Formula for a straight line supply curve: P = aQ + b or Qs = a + bP
- a = intercept, b = constant slope i.e. the impact of a unit change in x on the level of y
- Slope of a straight line: Δy / Δx = (y2 - y1) / (x2 - x1)
Point (Own-Price) Elasticity of Demand
- Steps to calculate point elasticity of demand:
- Make sure Q is the subject of the formula
- Find equilibrium price and quantity
- Calculate point elasticity of demand: -b (P/Q)
- Recall: -b = slope, where ΔQ/ΔP is the slope of the curve
Example of Point Elasticity of Demand
- Demand function: QD = 65 000 – 5 000P
- Supply function: QS = 5 000 + 15 000P
- Equilibrium price and quantity: P = 3, Q = 50 000
- Elasticity of demand at market equilibrium: -b (P/Q)
Income Elasticity of Demand
- Formula: Ey = CX (I/Y), where Ey is income elasticity of demand, C is the numerical value, I is income, and Y is quantity demanded
- Example: Qb = 100 – 30Pb – 20Pc + 0.005I, where Qb is quantity demanded of bubblegum
- Calculate Qb, then Ey = CX (I/Y) = +0.005 (25000/55) = +2.2727
Cross-Price Elasticity of Demand
- Formula: Ec = eX (Pc/Q), where Ec is cross-price elasticity of demand, e is the numerical value, Pc is price of related good, and Q is quantity demanded
- Example: Qb = 100 – 30Pb – 20Pc + 0.005I, where Qb is quantity demanded of bubblegum
- Calculate Qb, then Ec = eX (Pc/Q) = -20 (1/55) = -0.3636
Quiz on algebra formulas and concepts, focusing on elasticity and its applications, including straight line demand and supply curves.
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