Asked by Jon
commodity Price Elasticity of demand
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Potatoes 0.3
If I know there is a fall in the price of potatoes how do i predict the corresponding direction of change in total spending?
Total spending on potatoes is P*Q. Elasticity is (%change in Q)/(%change in P). So, if prices fall by 10%, quantity will rise by 3%. Now total spending is (.9*P)*(1.03*Q). Take it from here and draw your conclusions.
I don't know what the decrease of the price of potatoes is, so how do i figure out if the total spending will go up or down??
Given you know the price elasticity, you can tell in at least two ways; mathmatically and logically. In my previous example I showed a 10% tax decrease. But the decrease could be anything (reasonable), and you would still get the same total spending direction. If price falls by (1-x) then quantity rises by (1+.3x) where x is the percentage change in price. The combination is (1-x)*(1+.3x) = 1-.7x-.3x^2. which must be less than 1 for any positive x.
Logically now. If price falls by some x percent and quantity rises by something less than x, what has got to happen to Price time quantity. Gotta go down.
Generally speaking, the effect on spending is a wash when the elasticity is 1.0. With and elastic demand, >1, then a decrease in price leads to an increase in spending.
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Potatoes 0.3
If I know there is a fall in the price of potatoes how do i predict the corresponding direction of change in total spending?
Total spending on potatoes is P*Q. Elasticity is (%change in Q)/(%change in P). So, if prices fall by 10%, quantity will rise by 3%. Now total spending is (.9*P)*(1.03*Q). Take it from here and draw your conclusions.
I don't know what the decrease of the price of potatoes is, so how do i figure out if the total spending will go up or down??
Given you know the price elasticity, you can tell in at least two ways; mathmatically and logically. In my previous example I showed a 10% tax decrease. But the decrease could be anything (reasonable), and you would still get the same total spending direction. If price falls by (1-x) then quantity rises by (1+.3x) where x is the percentage change in price. The combination is (1-x)*(1+.3x) = 1-.7x-.3x^2. which must be less than 1 for any positive x.
Logically now. If price falls by some x percent and quantity rises by something less than x, what has got to happen to Price time quantity. Gotta go down.
Generally speaking, the effect on spending is a wash when the elasticity is 1.0. With and elastic demand, >1, then a decrease in price leads to an increase in spending.
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