Some of you looked confused on the changing elasticity of a straight line with "unchanging" slope. Here's an example - unfortunately, I can't draw it here, but assume that it is a downward sloping, unit elastic curve (it looks like a regular demand curve).
Because of the differences in quantities, even if the change in price stays the same, the percentage change in Q will differ along the demand curve.
So - if the change from $10 to $9 results in a change in QD of 1 to 2:
2-1/(2+1)/2 over 9-10/(9+10)/2 = 1/1.5 over 1/9 = .66/.11 = 6 = elastic
But, further down the curve, as the price changes just one dollar, the QD's are different, so the percentage change is different. For example, further down the same demand curve, if the price fall from $6 to $5, the QD rises from 5 to 6:
6-5/(6+5)/2 over 6-5/(5+6)/2 = 1/5.5 over 1/5.5 = .18/.18 = 1 = unit elastic
Then, even further down the same demand curve, the QD's are also different. For example, when price falls from $3 to $2, the QD rises from 8 to 9:
9-8/(9+8)/2 over 3-2/(3+2)/2 = 1/8.5 over 1/2.5 = .12/.4 = .3 = inelastic.
Even though the change is $1 in each part of the curve, and even though the QD is only changing by 1 each time, because of the law of demand and the fact that you're looking for percentage change, the elasticity can be different in different parts of the curve.
Good job on the three in the previous post - you have the changes down really good there.
Other things to tease your brain:
1. When would you want to own a business that sells price-elastic products? Why?
2. In 2000, cattle were selling for 69 cents a pound, up from 61 cents a year earlier. This was despite the fact that supply increased over the year.
3. The rent for apartments in New York City has been rising sharply. Demand for apartments in New York City has also been rising sharply. This is hard to explain, because the law of demand says that higher prices should lead to lower quantity demanded. Do you agree or disagree? (and, as always, explain)
4. Taxicab fares in most cities are regulated. Several years ago, cab drivers in Boston obtained permission to raise their fares 10%, and they anticipated that revenues would increase by about 10% as a result. They were disappointed, however. When the commissioner granted the 10% increase, revenues increased by only about 5%. What can you infer about the elasticity of demand for taxicab drivers? What were cab drivers assuming about the elasticity of demand? (You may not be able to answer this one without looking up other ways to determine elasticity in your book) :)
And a tougher one, just to strain your brain even more:
5. Studies have fixed the short-run price elasticity of demand for gasoline at the pump at -.20. Suppose that international hostilities lead to a sudden cut off of crude oil supplies. As a result, US supplies of refined gasoline drop 10%.
If gasoline was selling for $1.40 per gallon before the cutoff, how much of a price increase would you expect to see in the coming months?
Any questions from you?