After you have worked through this section of the learning unit, you should be able to:
- describe the measurement of price elasticity
- calculate the price elasticity coefficient using the midpoint method
Let's start with a question:
You are given the following information:
The price of a good or service increases by R5, while the quantity demanded decreases by 1 000.
Would you say that the price increase is:
We need more information than only the absolute changes (i.e. R5). Unless we know what the basis is on which these changes have taken place, we cannot say whether it is big or small. We need to determine the relative changes in order to answer the question. In other words, we need to know the percentage change in price before we can make a judgement.
Would you say that the decrease in the quantity demanded is:
We need more information than only the absolute changes (i.e. 1 000). Unless we know what the basis is on which these changes have taken place, we cannot say whether it is big or small. We need to determine the relative changes in order to answer the question. In other words, we need to know the percentage change in quantity before we can make a judgement.
Let's see what happens when we know what the percentage changes are. In each of the questions below, select the best answer.
You are provided with the following information:
The price of a good increases by R5, which is a 100% increase in the price, while the quantity demanded decreases by 1 000, which is a 1% decrease in quantity demanded.
Would you say that the price increase is:
There is no doubt that the increase in the price is big (100%). We are now working with relative changes, and are thus in a position to make a judgement.
Think again. There is no doubt that the increase in the price is big (100%). We are now working with relative changes, and are thus in a position to make a judgement.
Think again. There is no doubt that the increase in the price is big (100%). We are now working with relative changes, and are thus in a position to make a judgement.
Would you say that the decrease in the quantity demanded is:
Think again. There is no doubt that the decrease in the quantity demanded is small (1%). We are now working with relative changes, and are thus in a position to make a judgement.
Correct. There is no doubt that the decrease in the quantity demanded is small (1%). We are now working with relative changes, and are thus in a position to make a judgement.
Think again. There is no doubt that the decrease in the quantity demanded is small (1%). We are now working with relative changes, and are thus in a position to make a judgement.
With this example we can say that a big change in price leads to a small change in the quantity demanded, and we can in effect calculate the price elasticity coefficient on the basis of this information.
Once we know these percentages changes, it is possible to measure price elasticity through the price elasticity coefficient.