__Elasticity__:

Elasticity is a measure of the responsiveness of quantity demanded to a change in the price level of the product, a product may be perfectly elastic, perfect inelastic and unitary, when a good’s __elasticity__ is perfectly *inelastic* then a change in the price of the product will not change the amount __demanded__, a perfect elastic product is that which its demand will change by a large magnitude than the change in price.

The formula for calculating *elasticity* is as follow

E = (change in demand / change in price) multiplied by the (price/ demand)

E = (D2 – D1/ P2 – P1) X (P1 /D1)

Where

D1 is the demand before price increase

Elasticity

D2 is the demand for the product after price increase

P1 price before increase

P2 price after increase

E is elasticity

For our question where the price of apples rises from $3 a pound to $3.50 and the consumption of apples drops from 35 pounds of apples a month to 20 pounds of apples, we will analyze this graphically as follows:

When the price increases from P1 to P2 then the demand will decline as shown in the *above* diagram and this is from D1 to D2.

In our case the price elasticity of demand will be given by the formula:

E = (D1 – D2/ P1 – P2) X (P1 /D1)

__Elasticity__

P1=3

P2 = 3.5

D1=35

D2=20

D1–D2=15

P2–P1=0.5

P1 /D1 = (3/35)

E = 2.571429

The following diagram demonstrates the various elastic ties that a product can have

Elasticity

From the above diagram the various elasticity’s are demonstrated

Demand curve 1 is perfectly elastic

Demand curve 2 is unitary elasticity

Demand curve 3 is perfect inelastic

From our answer above we can say that our demand curve resembles that of demand curve 2 although in our case our demand is elastic, this is because a change in the price will lead to a change in the demand of the product.

Elasticity

References:

Elasticity

Stratton (1999) Economics: A New Introduction, McGraw Hill Publishers, New York

Philip Hardwick (2004) Introduction to Modern Economics, Pearson Education Press, UK

Anthony Samuelson (1964) Economics, McGraw-Hill publishers, New York

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