3. Suppose that the price elasticity of demand for wheat is known to be -0.75. Will a good wheat crop (which increases the supply of wheat) be likely to increase or decrease the revenues of farmers? Carefully explain.
Answers
Answer:
Price elasticity
Explanation:
Price elasticity of demand, also known simply as "price elasticity," is more specific to price changes than the general term known as "elasticity of demand."
The formula for price elasticity is:
Price Elasticity = (% Change in Quantity) / (% Change in Price)
Let's look at an example. Assume that when gas prices increase by 50%, gas purchases fall by 25%. Using the formula above, we can calculate that the price elasticity of gasoline is:
Price Elasticity = (-25%) / (50%) = -0.50
Thus, we can say that for every percentage point that gas prices increase, the quantity of gas purchased decreases by half a percentage point.
Price elasticity is usually negative, as shown in the above example. That means that it follows the law of demand; as price increases quantity demanded decreases. As gas price goes up, the quantity of gas demanded will go down.