Elasticity Question

CFA Level I
#1

You know when we calculate Own price elasticity = (% Change in quanity demanded/% Change in price) and % change for both is calculated as (Q0 - Q1)/[(Q0+Q1)/2] and (P0 - P1)/[(P0+P1)/2]

Well my question is for Income Elasticity and for Cross-Price Elasticity do we calculate the percentage changes the same way? or would they just be (Q0-Q1)/Q0 and (P0-P1)/P0

I’ve just been a little bit confused on the calculation if anyone cares to weigh in

#2

Crazy I was just barely studying this today. The numerators with Q0 Q1 are the same, the only difference is the denominators for the 3 elasticity types. What bothers me is there are 3 different ways of solving these questions depending on what numbers they give you. I would also review what the answer means as far as complementary/substitute inferior/normal etc.

#3

Yeah I know what you mean, I already have a good understanding of what the answers mean its just a matter of making sure I get the right answer first

#4

My question exactly as i was revising econ

so what is d right answer? Shud we use average or initial when making income and substitution elasticity?

#5

I’m not so sure now. I just finished reading the part in the book, page 46 and it mentions that that’s arc elasticity and that it’s only used in certain scenarios as outlined on that page…

So now I have even own price elasticity of demand mixed up :S

Help!!!

#6

I think you ALWAYS use the average price formula listed at the top, but someone please correct me.

#7

Guys, the formula OP gave above is called ARC Elasticity. It is used where we are only given two points for Price and 2 points for Quantity. The reason Arc is used is because we can not assume our demand and supply schedule is linear. Therefore, we take estimates (averages) and calculate elasticity in that way.

You ONLY do it this way if you are only given 2 points, otherwise, you can use linear elasticity which is the standard elasticity formula.

#8

Thanks for clearing that up. And just to make sure we’re on the same page that applies to Income elasticity and Cross price elasticity?

#9

Yes

#10

And linear elasticity is actually pretty easy. If you are looking for X elasticity, the formula is

( coefficient [Slope] of X varible) * (X/Q)