Question

price elasticity on the supply & demand curve
a. watch video clip 1 (see directions tab) about price elasticity and answer the questions below:

1. why is calculating elasticity important for businesses?
2. write the formula for elasticity (hint: long formula on left side of the whiteboard).
3. is an elastic product greater, equal, or less than 1?
4. what does unit elastic mean?
5. in the first example that the teacher walked you through, he found after his calculations that the outcome was elastic. what would this mean for a business owner? (hint: he explains this after he finds out it is elastic)

Explanation:

1. Calculating elasticity helps businesses understand how changes in price will affect quantity demanded or supplied, aiding in pricing, production, and revenue - maximization decisions.
2. The formula for price elasticity of demand or supply is $E = \frac{\%\text{ change in quantity}}{\%\text{ change in price}}$.
3. An elastic product has a price - elasticity coefficient greater than 1. This means that a percentage change in price leads to a more than proportionate percentage change in quantity demanded or supplied.
4. Unit elastic means that the percentage change in quantity demanded or supplied is equal to the percentage change in price, resulting in a price - elasticity coefficient of exactly 1.
5. If a product is elastic, a business owner should be cautious about price changes. A price increase will lead to a more than proportionate decrease in quantity demanded, reducing total revenue. A price decrease will lead to a more than proportionate increase in quantity demanded, potentially increasing total revenue.

Answer:

1. It helps in pricing, production, and revenue - maximization decisions.
2. $E = \frac{\%\text{ change in quantity}}{\%\text{ change in price}}$
3. Greater than 1.
4. The percentage change in quantity is equal to the percentage change in price, with a coefficient of 1.
5. A price increase may reduce total revenue, and a price decrease may increase total revenue.