Microeconomics CLEP - Price Elasticity

[BeeMarie]

I've just started working on Microeconomics study and I haven't went through the flash cards yet. I'm trying to 'get' the algebra concept of elasticity.

If I'm given the actual percentages in a question, I think should be able to figure the elasticity as (% change in rise)/(% change in run).

But, if I'm given prices or quantities etc. and asked to calculate the % change and the elasticity, then could I use the difference quotient? I've read that the average (or midpoint) is what they actually use.

difference quotient: f(x) = f(x+h) - f(x) / h

If it isn't that, then I think it is the midpoint formula. ???


Does anyone know the answer to this question? Or if I probably won't be asked to figure that, then let me know so I don't waste time trying to figure it out

Thanks,
Bee

[snazzlefrag]

Originally Posted by BeeMarie

I've just started working on Microeconomics study and I haven't went through the flash cards yet. I'm trying to 'get' the algebra concept of elasticity.

Hi Bee,

I have good news for you! You are going entirely too deep. This is an economics exam, not an algebra exam.

With regards to elasticity, they will likely do one or more of the following:

1) Show you a graph and ask you what type of demand is represented (you'll be able to tell by simply looking at the steepness and direction of the line).

2) They might ask you to calculate the price elasticity of demand, but they will GIVE you the necessary percentages (ie, % change in quantity and % change in price). Additionally, the math involved will be quite simplistic.
For example, they might ask you to calculate the price elasticity of demand when change in quantity is 10% and change in price is 5% (Eg, .10/.5=.2).

3) They might tell you what the price elasticity of demand is (Eg, 1.4), and then ask you whether it is elastic or inelastic (Eg, if it is 1.4 it is "Elastic" because it is >1, or if it is 0.75 it is "Inelastic" because it is <1).

4) They might ask you to identify what the terms elastic, inelastic, unitary elastic, or perfect inelastic mean (Eg, Which best describes the term "elastic demand"? And the answer will be something like "As prices increase, demand decreases, and revenue goes down")

As you can see, none of the above require you to do anything more mathematically complex than divide two numbers. You don't need to worry about difference quotients and algebraic functions for this exam. If you know the terminology and the simple formulas, the math will be VERY easy (I promise).

Hope that helps,
Snazzlefrag

[BeeMarie]

Thank you so much! That told me exactly what I needed to know

~Bee