Question #51724

Suppose that the market for paint is in equilibrium. The demand for paint is given by Qd=5000-8P. The supply of paint is given by Qs=2000+2P. What is the price elasticity of demand at the market equilibrium?

Expert's answer

Price elasticity of demand (PED) measures the change in the quantity

demanded relative to a change in price for a good or service.

The formula for price elasticity is:

Price Elasticity = (% Change in Quantity) / (% Change in Price)

First of all it is necessary to calculate equilibrium price and demand

Qd = Qs

5000-8P = 2000+2P

10P = 3000

P = 300

Qd = 5000 – 8*300 = 5000 – 2400 = 2600

If price will rise to 400:

% Change in Price = (400 – 300)/300*100% = 33,3%

Qd(new) = 5000 – 8*400 = 5000 – 3200 = 1800

% Change in Quantity = (1800 - 2600)/2600 *100% = -30,7%

Price Elasticity = (% Change in Quantity) / (% Change in Price) =

-30,7%/33,3% = -0,92

Thus, we can say that for every percentage point that prices increase,

the quantity decreases by 0,92 percentage point.

demanded relative to a change in price for a good or service.

The formula for price elasticity is:

Price Elasticity = (% Change in Quantity) / (% Change in Price)

First of all it is necessary to calculate equilibrium price and demand

Qd = Qs

5000-8P = 2000+2P

10P = 3000

P = 300

Qd = 5000 – 8*300 = 5000 – 2400 = 2600

If price will rise to 400:

% Change in Price = (400 – 300)/300*100% = 33,3%

Qd(new) = 5000 – 8*400 = 5000 – 3200 = 1800

% Change in Quantity = (1800 - 2600)/2600 *100% = -30,7%

Price Elasticity = (% Change in Quantity) / (% Change in Price) =

-30,7%/33,3% = -0,92

Thus, we can say that for every percentage point that prices increase,

the quantity decreases by 0,92 percentage point.

## Comments

## Leave a comment