{"id":2158,"date":"2018-03-27T23:23:50","date_gmt":"2018-03-27T23:23:50","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/?post_type=chapter&#038;p=2158"},"modified":"2024-04-25T03:03:07","modified_gmt":"2024-04-25T03:03:07","slug":"price-elasticity-in-a-given-situation","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/chapter\/price-elasticity-in-a-given-situation\/","title":{"raw":"Price Elasticity Calculations","rendered":"Price Elasticity Calculations"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Objectives<\/h3>\r\n<ul>\r\n \t<li>Calculate the price elasticity of a product based on the given situation<\/li>\r\n<\/ul>\r\n<\/div>\r\nRemember, elasticity\u00a0measures the responsiveness of one variable to changes in another variable. In the last section we looked at\u00a0price elasticity of demand, or how much a change in price affects the quantity demanded. In this section we will look at both\u00a0elasticity of demand and elasticity of supply.\u00a0Supply can also be elastic, since a change in price will influence the quantity supplied.\r\n\r\nIn order to measure elasticity, we need to calculate percentage change, also known as a\u00a0<strong>growth<\/strong>\u00a0<strong>rate<\/strong>.\u00a0The formula for computing a growth rate is straightforward:\r\n<p style=\"text-align: center;\">Percentage\u00a0change =\u200b\u200b\u200b Change\u00a0in\u00a0quantity\u200b\u200b \/ Quantity<\/p>\r\nSuppose that a\u00a0job pays $10 per hour. At some point, the individual doing the job is\u00a0given\u00a0a $2-per-hour raise. The percentage change (or growth rate) in pay is:\r\n<p style=\"text-align: center;\">$2 \/ $10 = 0.20\u00a0or\u00a020%.<\/p>\r\nNow, recall that we defined elasticity as the percentage change in something divided by the percentage change in something else. Let\u2019s take the price elasticity of demand as an example. The price elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price:\r\n<p style=\"text-align: center;\">Price\u00a0elasticity\u00a0of\u00a0demand =\u200b Percentage\u00a0change\u00a0in quantity demanded \/\u00a0Percentage change in price<\/p>\r\nThere are two general methods\u00a0for calculating elasticities: the point elasticity approach and the midpoint (or arc) elasticity approach. Elasticity looks at the percentage change in quantity demanded divided by the percentage change in price, but which quantity and which price should be the denominator in the percentage calculation? The point approach uses the initial price and initial quantity to measure percent change. This makes the math easier, but the more accurate approach is the midpoint approach, which uses the average price and average quantity over the price and quantity change. (These are the price and quantity halfway between the initial point and the final point.\u00a0Let\u2019s compare the two approaches.)\r\n\r\nSuppose the quantity demanded of a product\u00a0was 100\u00a0at one point on the demand curve, and then it moved to\u00a0103 at another point. The growth rate, or percentage change in quantity demanded, would be the change in quantity demanded (103\u2212100) divided by the average\u00a0of the two quantities demanded\u00a0(103+100) \/ 2\u200b.\r\n\r\nIn other words,\u00a0the growth rate:\r\n<p style=\"text-align: center;\">103\u2212100 \/ ((103+100) \/ 2)<\/p>\r\n<p style=\"text-align: center;\">= 3 \/ 101.5<\/p>\r\n<p style=\"text-align: center;\">= 0.0296<\/p>\r\n<p style=\"text-align: center;\">= 2.96% growth<\/p>\r\nNote that if we used the point approach, the calculation would be:\r\n<p style=\"text-align: center;\">(103\u2013100) \/ 100<\/p>\r\n<p style=\"text-align: center;\">= 3%\u00a0growth<\/p>\r\nThis produces\u00a0nearly the same result as the slightly more complicated midpoint method (3% vs. 2.96%). If you need a rough approximation, use the point\u00a0method. If you need accuracy, use the midpoint\u00a0method.\r\n\r\nIf:\r\n<p style=\"text-align: center;\">% change in quantity &gt; % change in price &gt; 1 = Elastic demand<\/p>\r\n<p style=\"text-align: center;\">% change in quantity &gt; % change in price &lt; 1 = Inelastic demand<\/p>\r\n\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Questions<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/ee3bb5b3-e64a-4728-9d75-4e77b56a4d56\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Objectives<\/h3>\n<ul>\n<li>Calculate the price elasticity of a product based on the given situation<\/li>\n<\/ul>\n<\/div>\n<p>Remember, elasticity\u00a0measures the responsiveness of one variable to changes in another variable. In the last section we looked at\u00a0price elasticity of demand, or how much a change in price affects the quantity demanded. In this section we will look at both\u00a0elasticity of demand and elasticity of supply.\u00a0Supply can also be elastic, since a change in price will influence the quantity supplied.<\/p>\n<p>In order to measure elasticity, we need to calculate percentage change, also known as a\u00a0<strong>growth<\/strong>\u00a0<strong>rate<\/strong>.\u00a0The formula for computing a growth rate is straightforward:<\/p>\n<p style=\"text-align: center;\">Percentage\u00a0change =\u200b\u200b\u200b Change\u00a0in\u00a0quantity\u200b\u200b \/ Quantity<\/p>\n<p>Suppose that a\u00a0job pays $10 per hour. At some point, the individual doing the job is\u00a0given\u00a0a $2-per-hour raise. The percentage change (or growth rate) in pay is:<\/p>\n<p style=\"text-align: center;\">$2 \/ $10 = 0.20\u00a0or\u00a020%.<\/p>\n<p>Now, recall that we defined elasticity as the percentage change in something divided by the percentage change in something else. Let\u2019s take the price elasticity of demand as an example. The price elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price:<\/p>\n<p style=\"text-align: center;\">Price\u00a0elasticity\u00a0of\u00a0demand =\u200b Percentage\u00a0change\u00a0in quantity demanded \/\u00a0Percentage change in price<\/p>\n<p>There are two general methods\u00a0for calculating elasticities: the point elasticity approach and the midpoint (or arc) elasticity approach. Elasticity looks at the percentage change in quantity demanded divided by the percentage change in price, but which quantity and which price should be the denominator in the percentage calculation? The point approach uses the initial price and initial quantity to measure percent change. This makes the math easier, but the more accurate approach is the midpoint approach, which uses the average price and average quantity over the price and quantity change. (These are the price and quantity halfway between the initial point and the final point.\u00a0Let\u2019s compare the two approaches.)<\/p>\n<p>Suppose the quantity demanded of a product\u00a0was 100\u00a0at one point on the demand curve, and then it moved to\u00a0103 at another point. The growth rate, or percentage change in quantity demanded, would be the change in quantity demanded (103\u2212100) divided by the average\u00a0of the two quantities demanded\u00a0(103+100) \/ 2\u200b.<\/p>\n<p>In other words,\u00a0the growth rate:<\/p>\n<p style=\"text-align: center;\">103\u2212100 \/ ((103+100) \/ 2)<\/p>\n<p style=\"text-align: center;\">= 3 \/ 101.5<\/p>\n<p style=\"text-align: center;\">= 0.0296<\/p>\n<p style=\"text-align: center;\">= 2.96% growth<\/p>\n<p>Note that if we used the point approach, the calculation would be:<\/p>\n<p style=\"text-align: center;\">(103\u2013100) \/ 100<\/p>\n<p style=\"text-align: center;\">= 3%\u00a0growth<\/p>\n<p>This produces\u00a0nearly the same result as the slightly more complicated midpoint method (3% vs. 2.96%). If you need a rough approximation, use the point\u00a0method. If you need accuracy, use the midpoint\u00a0method.<\/p>\n<p>If:<\/p>\n<p style=\"text-align: center;\">% change in quantity &gt; % change in price &gt; 1 = Elastic demand<\/p>\n<p style=\"text-align: center;\">% change in quantity &gt; % change in price &lt; 1 = Inelastic demand<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Questions<\/h3>\n<p>\t<iframe id=\"assessment_practice_ee3bb5b3-e64a-4728-9d75-4e77b56a4d56\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/ee3bb5b3-e64a-4728-9d75-4e77b56a4d56?iframe_resize_id=assessment_practice_id_ee3bb5b3-e64a-4728-9d75-4e77b56a4d56\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-2158\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Price Elasticity in a Given Situation. <strong>Authored by<\/strong>: Bob Danielson. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":62559,"menu_order":10,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Price Elasticity in a Given Situation\",\"author\":\"Bob Danielson\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"3d32deab-5766-4877-9684-c8ba6a3dc958, 29ebbb3c-fec3-448d-8fb7-a23b89abc571","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-2158","chapter","type-chapter","status-publish","hentry"],"part":2139,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/chapters\/2158","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/wp\/v2\/users\/62559"}],"version-history":[{"count":12,"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/chapters\/2158\/revisions"}],"predecessor-version":[{"id":6509,"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/chapters\/2158\/revisions\/6509"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/parts\/2139"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/chapters\/2158\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/wp\/v2\/media?parent=2158"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/pressbooks\/v2\/chapter-type?post=2158"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/wp\/v2\/contributor?post=2158"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-retailmanagement\/wp-json\/wp\/v2\/license?post=2158"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}