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Economics Price Elasticity of Demand

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  1. Feb 14, 2017 #1
    1. The problem statement, all variables and given/known data
    So, my professor gave a test this weekend. I missed a problem concerning price elasticity of demand, but that's only because I assumed the opposite direction.

    Now, I'm considering challenging this question, because the price elasticity was listed as a positive number.

    2. Relevant equations
    Ep = (delta-Q)/(delta-P)*(P/Q)

    3. The attempt at a solution
    I realize that most goods have a negative elasticity. BUT, that negative wasn't represented in this question.
    Thus I said it would lead to an increase. By definition of the formula, it should've been negative. Correct??
     
  2. jcsd
  3. Feb 14, 2017 #2

    Ray Vickson

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    What did the question actually say? Of course, most goods have a negative PE, but some have a positive PE. The correctness of an answer depends on the question asked.
     
  4. Feb 14, 2017 #3
    If the value of price elasticity of demand is 0.2, it implies that a 1 percent increase in price leads to a:

    Again, I know that technically I'm right.
    I just don't like an environment where the validity of a question depends on my supposition of what "most" cases are.
     
  5. Feb 14, 2017 #4

    Ray Vickson

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    Technically, it does not matter whether or not most goods have a negative ED; you were GIVEN a positive ED and asked to go on from there. Just using the definition should give you everything you need. Even if 99.9% of the goods in this world have a negative ED that does not affect the question here.
     
  6. Feb 14, 2017 #5
    Hello.

    Price elasticity of demand is a numerical measure of the responsiveness of demand given/following a change in price. Use the simple formula:

    [tex] PED = \frac{Percentage change in quantity demanded}{Percentage change in price}[/tex]

    We know that goods which follow the law of demand, all price elasticities are always negative, but one can leave it as positive. Most textbooks and exams leave it as positive.

    ZtjsxOh.png

    Only veblen and giffen goods do not follow the law of demand, and hence have a positive PED. Have you read Greg Mankiws microeconomics? :) A more advanced book with lots of examples and applications is
    Pindyck and rubenfiled microeconomics.
    Usually it would be mentioned if they were Veblen or Giffen goods. These are goods in which quantity demanded increases given/following an increase in price. Their QD have a direct relationship with price. But if you are studying the basics I dont think they would be included.

    https://en.wikipedia.org/wiki/Price_elasticity_of_demand
    "Although the PED is negative for the vast majority of goods and services, economists often refer to price elasticity of demand as a positive value (i.e., in absolute value terms).[4]"

    Is absolute value what people mean when they say the value? kind of like magnitude?
     
    Last edited: Feb 14, 2017
  7. Feb 14, 2017 #6
    Gracias. Thanks for confirming. That's how I felt; it was a positive Ed. I have a few other questions I need to bring up with my professor as well. The questions are poorly worded, quite frankly
     
  8. Feb 14, 2017 #7

    Ray Vickson

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    Certainly it is ambiguous.
     
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