13.Explain the ways of computing the price elasticity of demand

The price elasticity of a good or service is calculated as the percent change in the quantity demanded of a good divided by the percent change in the price for that good. A price elasticity greater than one indicates that the good is elastic, that quantity demanded is highly sensitive to changes in price. For example, a 1-percent change in the price of chicken might cause a 5-percent decrease in sales. A price elasticity less than one tells you that your good is inelastic. In this case, price changes will have a small impact on quantity demanded. If a good/service has a price elasticity of one, also called unitary elasticity, this means that a 5-percent change in price will result in a 5-percent change in quantity demanded.

Price elasticity of demand = Percentage change in quantity demanded./Percentage change in price

14.Explain the relationship between total revenue and the price elasticity of demand

Price elasticity tells how much of an impact a change in price will have on the consumers' willingness to buy that item

Total revenue is calculated as the quantity of a good sold multiplied by its price. It is a measure of how much money a company makes from selling its product, before any costs are considered. Obviously, the goal of a company is to maximize profits, and one way to do this is by increasing total revenue. The company can increase its total revenue by selling more items or by raising the price.

Why Elasticity Matters

Price elasticity of demand and total revenue are closely interrelated because they deal with the same two variables, P and Q. If your product has elastic demand, you can increase your revenue by decreasing the price of that good. P will decrease, but Q will increase at a greater rate, thus increasing total revenue. If the product is inelastic, then you can actually raise prices, sell slightly less of that item but make higher revenue. As a result, it is important for management to know whether its product has inelastic or elastic demand.

some general rules:

• When demand is inelastic (a price elasticity less than 1), price and total

revenue move in the same direction.

• When demand is elastic (a price elasticity greater than 1), price and total

revenue move in opposite directions.

• If demand is unit elastic (a price elasticity exactly equal to 1), total revenue

remains constant when the price changes.

Figure3

15.Explain the meaning and types of the elasticityof Supply. Determine the elasticity of Supply

The law of supply states that higher prices raise the quantity supplied. The price elasticity of supply measures how much the quantity supplied responds to changes in the price. Supply of a good is said to be elastic if the quantity supplied responds substantially to changes in the price. Supply is said to be inelastic if the quantity supplied responds only slightly to changes in the price. The price elasticity of supply depends on the flexibility of sellers to change the amount of the good they produce. For example, beachfront land has an inelastic supply because it is almost impossible to produce more of it. By contrast, manufactured goods, such as books, cars, and televisions, have elastic supplies because firms that produce them can run their factories longer in response to a higher price. In most markets, a key determinant of the price elasticity of supply is the time period being considered. Supply is usually more elastic in the long run than in the short run. Over short periods of time, firms cannot easily change the size of

their factories to make more or less of a good. Thus, in the short run, the quantity supplied is not very responsive to the price. By contrast, over longer periods, firms can build new factories or close old ones. In addition, new firms can enter a market, and old firms can shut down. Thus, in the long run, the quantity supplied can respond substantially to price changes.