- The law of demand states that as price increases, quantity demanded decreases, assuming other factors stay constant. - Elasticity measures responsiveness of quantity to determinants like price. Price elasticity of demand measures responsiveness of quantity to price changes. - Using a midpoint method and demand schedule, price elasticity is calculated between two prices. At a price increase from $8 to $10 with income of $10,000, elasticity is unitary. With income of $12,000 it is inelastic. - Income elasticity is calculated between two income levels at given prices. At a price of $12 and income increase from $10,000 to $12,000, elasticity is positive indicating

1. Law of Demand
 Other things equal, the quantity demanded of a good
falls when the price of good rises .
Elasticity
A measure of the responsiveness of quantity demanded
or quantity supplied to one of its determinants.
Price Elasticity of Demand
A measure of how much the quantity demanded of a
good responds to a change in the price of that
good, computed as the percentage change in quantity
demanded divided by the percentage change in price.

2. Question
Suppose that your demand schedule for compact discs
is as follows:
Price
QUANTITY DEMANDED
QUANTITY DEMANDED
$
(INCOME = $10,000)
(INCOME = $12,000)
8
40
50
10
32
45
12
24
30
14
16
20
16
8
12

3. a.
Use the midpoint method to calculate your price
elasticity of demand as the price of compact discs
increases from $8 to $10 if (i) your income is $10000 and
(ii) your income is $ 12000.
b.
Calculate your income elasticity of demand as your
income increases from $10,000 to $12000 if (i) the price
is $12 (ii) the price is $16.

4. Solution
a(i).
The price of compact discs increase from $8 to $10,
(i) if our income is $10,000;
According to the midpoint method,
(Q2 - Q1)/[( Q2 + Q1)/2]
Price elasticity of demand =
(P2 - P1)/[( P2 + P1)/2]
P1 = 8
P2 = 10
Q1 = 40
Q2 = 32
Price
QUANTITY
DEMANDED
QUANTITY
DEMANDED
$
(INCOME =
$10,000)
(INCOME =
$12,000)
8
40
50
10
32
45

5. So,
(32 -40)/ [ (32+ 40/2]
Price elasticity of demand =
(10 - 8)/[( 10 + 8)/2]
-8/ 72/2
Price elasticity of demand =
-8/36
=
2/18/2
-2/9
=
2/9
2/9
Price elasticity of demand = -1
Our price elasticity of demand is equal 1
So, our price elasticity of demand is unit elastic demand.

6. Price
P1 = 8 , Q1 = 40 – total revenue = p1 x Q1 = 8x40 = 320
P2= 10,Q2 = 32 – total revenue = P2 x Q2 = 10x32 = 320
-in unit elastic
demand(Ed=1) , a
change in the price
does not affect total
revenue.
p2
p1
Demand
curve
q2
q1
Quantity

7. a(ii). The price of compact discs increase from $8 to $10,
(ii) if our income is $12,000;
According to the midpoint method,
(Q2 - Q1)/[( Q2 + Q1)/2]
Price elasticity of demand =
(P2 - P1)/[( P2 + P1)/2]
P1 =
P2 =
8
10
Q1 = 50
Q2 = 45
Price
QUANTITY
DEMANDED
QUANTITY
DEMANDED
$
(INCOME =
$10,000)
(INCOME =
$12,000)
8
40
50
10
32
45

8. So,
(45 -50)/ ( 45+ 50/2]
Price elasticity of demand =
(10 - 8)/[( 10 + 8)/2]
-5/ 95/2
Price elasticity of demand =
-5x 2/95
=
2/18/2
-2/19
=
2/9
2/9
2
=
19
9
x
2
Price elasticity of demand = 9/19 = 0.47
Our price elasticity of demand is smaller than 1
So, Our price elasticity of demand is inelastic demand.

9. Price
P1 = 8 , Q1 = 50 – total revenue = p1 x Q1 = 8x50 = 400
P2= 10,Q2 = 45 – total revenue = P2 x Q2 = 10x32 = 450
-in inelastic demand
(Ed < 1) , a price
increase rises total
revenue and a price
decrease reduces
total revenue.
p2
p1
Demand
curve
q2
q1
Quantity

10. b.
Calculate your income elasticity of demand as your
income increases from $10,000 to $12000 if (i) the price
is $12
(ii) the price is $16.
Our income elasticity of demand is as our income
increases from $ 10,000 to $ 12000 if (i) the price is
$ 12
According to the equation
i.
Percentage change in quantity demanded
Income elasticity of demanded =
Percentage change in income
Price
QUANTITY DEMANDED
QUANTITY DEMANDED
$
(INCOME = $10,000)
(INCOME = $12,000)
12
24
30

11. Point A: Income = 10,000
Point B: Income = 12,000
Quantity Demanded = 24
Quantity Demanded = 30
Going to Point A to Point B, the income rises by 20 percent because
12000-10000/10000 x 100 = 20
and
the quantity demanded also rise 25 percent because
30-24/24 x 100 = 25
25
Income elasticity of demanded =
5
=
20
= 1.25
4
As our income increases from $ 10,000 to $ 12000 if (i) the price
is $ 12 , our income elasticity of demand is 1.25 and so it is
positive income elasticity and we conclude that is normal good.

12. ii. Our income elasticity of demand is as our income increases
from $ 10,000 to $ 12000 if (ii) the price is $ 16
According to the equation
Percentage change in quantity demanded
Income elasticity of demanded =
Percentage change in income
Price
QUANTITY
DEMANDED
QUANTITY
DEMANDED
$
(INCOME =
$10,000)
(INCOME =
$12,000)
16
8
12

13. Point A:
Point B:
Income = 10,000
Income = 12,000
Quantity Demanded = 8
Quantity Demanded = 12
Going to Point A to Point B, the income rises by 20 percent because
12000-10000/10000 x 100 = 20
and
the quantity demanded also rise 50 percent because
12-8/12 x 100 = 33
50
Income elasticity of demanded =
10
=
20
= 2.5
4
As our income increases from $ 10,000 to $ 12000 if (ii) the price
is $ 16 , our income elasticity of demand is 2.5 and so it is
positive income elasticity and we conclude that is normal good.