Supply and Demand

Running head: SUPPLY AND DEMAND FOR MICROECONOMICS

Supply and Demand for Microeconomics

Supply and Demand for Microeconomics

You are painter, the price of a gallon of paint increases from $3 a gallon to $3.5 a gallon.

Your usage of paint drops from 35 gallons / month – to 20 gallons / month.

Perform the following:

Compute the price of elasticity of demand for paint and show your calculations:

The simplest way to compute the demand of elasticity is to use the following formula:

Elasticity of Demand = % change in demand / % change in price.

PRICE QUANTITY DEMANDED

Situation A: $3.00/gallon 35 gallons/month

Situation B: $3.50/gallon 20 gallons/month

To calculate the percentage change in quantity going from situation A to B, we compare the change in the quantity demanded – a fall of 15 gallons. With the average of the quantity demanded of the two situations. So I will calculate:

% change in quantity demanded= -15 -15

______________ X 100 = ________ X 100 = 4.6%

(3,000 + 3,500) / 2 3,250

In the same way I can do the price % $ 0.15 X 100 = -$ 0.15 X 100 = 4.6%

------------------------ -----------

( $3 + $3.5)/2 $3.250

Important note – there are many different ways to calculate the price elasticity, however when using the midpoint method, the minus sign is always dropped and it is best to report the absolute value.

The price elasticity of demand is equal to the percentage change in the quantity demanded divided by the percent change in the price as