Question

4. Elastic, inelastic, and unit-elastic demand 

The following graph shows the demand for a good

For each of the regions listed in the following table, use the midpoint method to identify if the demand for this good is elastic, (approximately) unit elastic, or inelastic. 

True or False: The value of the price elasticity of demand is equal to the slope of the demand curve. 

Answer 1

Solution:

1)

Between W and X	1.29	Elastic
Between Y and Z	0.78	Inelastic
Between X and Y	1	Unitary Elastic

2) False

Working:

Percentage change in quantity:

W and X: 8 - 20 / [(8+20)/2] * 100 = -85.71%

X and Y: 20 - 28 / [(20 +28) / 2] * 100 = -33.33%

Y and Z = 28 - 56 / [(28 + 56)/2] * 100 = -66.67%

Percentage change in quantity:

W and X:140 - 70 / [(140 + 70) / 2] * 100 = 66.67%

X and Y: 70 - 50 / [(70 + 50) / 2] * 100 = 33.33%

Y and Z: 50 - 20 / [(50+20) / 2] * 100 = 85.71%

EOD:

W and X: 85.71% / 66.67% = 1.29 (Elastic)

X and Y: 33.33%/ 33.33% = 1 (Unitary elastic)

Y and Z = 66.67% / 85.71 = 0.78 (Inelastic)

Demand is inelastic if the price elasticity of demand is less than 1; Demand is elastic if the price elasticity of demand is more than 1; Demand is unitary elastic if the price elasticity of demand equals 1