Elasticity

Elasticity

Example

A consumer buys 20 litres of petrol when the price is €1.40 per litre. When the price increases to €1.60, as a result of an increase in carbon tax, the consumer purchases 18 litres.

  1. Calculate the consumer’s Price Elasticity of Demand (PED).

2. Is this demand for petrol price elastic or price inelastic?

3. Outline the implication for government revenue?

Answer

price elasticity of demand
Price elasticity of demand
  • -2/20c X (1.40 +1.60))/(20+18) =

– 0.1 x (3/38) = -0.1 x0.078 = – 0.79

  • The demand for petrol is inelastic.
  • An increase in the price of petrol will yield an increase in revenue for the government because the % increase in price will be greater than the percentage decrease in quantity demanded resulting in increased tax revenue for the government.
Price elasticity ofdemand
Price elasticity of demand

price elasticity of demand
Price elasticity of demand

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