Elasticity Case
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There are three different types of elasticity; Inelasticity, Elastic, and Unitary. According to our text, elasticity is, “a measure of responsiveness to changes in prices or incomes.” (Krugman & Wells, 2009). This simply states, that if a quantity of product and the cost of a product rises or falls. The quantity of a product may be of such a demand today then can change tomorrow. If the price of a product goes up then less will be bought bringing down the quantity demanded. With this, depending if the quantity and cost change higher, lower, or stay the same depends on the type of elasticity that product has.
If I am a painter, and the price of a gallon of paint increases from $3.00 a gallon to $3.50 a gallon and my usage of paint drops from 35 gallons a month to 20 gallons a month, there is an equation that can be performed to show the elasticity of the paint. The equation is as follows; {(Q2-Q1)/Q1}/{(P2-P1)/P1}. Placing the cost and quantity in the equation, the equation would be as follows; {(20-35)/35}/{($3.50-$3.00)/$3.00}. 20 – 35 / 3.50 – 3.00 = -15/0.5 = -45 = 2.57
35 3.00
35/3.00 17.5
So my answer for the price elasticity of demand for paint is 2.57 and is elastic.
The elasticity of demand for paint is elastic because it is greater than 1. When figuring the PED, you must know the start quantity and price of a product to be able to work out the equation. Then you must know the change in the quantity and price to complete the equation. Once completed, it is elastic if it is greater than 1, it is inelastic if it is less than 1, and it is unitary elastic if it is equal to 1.
References:
Krugman, P., & Wells, R. (2009). Chapter 6: Elasticity. In P. Krugman, & R. Wells, Economics (pp. 143-166). New York: Worth.