Question

Suppose that a change in the price of bread from R10 to R12.50 leads to a change in the quantity demanded of bread from 65 units to 90 units. Use the arc elasticity method to calculate and interpret the price elasticity of demand for bread

Answer 1

To calculate arc elasticity of demand , we first take the midpoint in between.

Midpoint $Q=\frac{(Q1+Q2)}{2}$

Midpoint P=$\frac{(P1+P2)}{2}$

Therefore;

Arc elasticity of demand (PED)= $\frac{\frac{Q2-Q1}{Q}}{\frac{P2-P1}{P}}$

Mid point of Q=$\frac{65+90}{2}$ =77.5

Mid point of P=$\frac{(10+12.5)}2=11.25$

% change in Q =$\frac{(90-65)}{77.5}=0.3226$

% change in P=$\frac{12.50-10}{11.25}=0.2222$

PED=$\frac{0.3226}{0.2222}=1.45$