Question

Assume that demand increases by 1 percent, the absolute value of price elasticity of demand is 1.0, and price elasticity of supply is 1.0. What is the percentage price change in this case?

Answer 1

Answer:

0.5% increase

Explanation:

the price elasticity of demand (PED) = % change in quantity demanded / % change in price. It measures how the quantity demanded changes in response to a 1% increase in price.

The price elasticity of supply (PES) = % change in quantity supplied / % change in price. It measures how the quantity supplied changes in response to a 1% increase in price.

In this case the demand increases, which should result from a decrease in price, but in order to satisfy the demand, the supply must increase and to do so, it will increase only by 1 / (1 + 1) = 1/2 of the original change in quantity demanded = 0.5%