# Principles of Microeconomics essay

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Question

Suppose you are a painter, and the price of a gallon of paint increases from \$3.00 a gallon to \$3.50 a gallon. Your usage of paint drops from 35 gallons a month to 20 gallons a month. Perform the following:

Compute the price elasticity of demand for paint and show your calculations.

Ed = (%u2206Qd/QdAverage) ÷ (%u2206P/PAverage)

Where:

Ed represents the price of demand

%u2206Qrepresents the absolute change in quantity

QdAverage  represents the average change in quantity

%u2206P represents the absolute change in price

PAverage represents the average change in price (Arnold, 2008)

 Quantity Demanded Price 35 gallons \$ 3.00 per gallon 20 gallons \$ 3.50 per gallon 15 gallons (change in quantity) \$-0.5 per gallon (change in price)

Incorporating the figures in the formula:

Ed =  {(35-20) ÷ (35+20)/2}÷ {(3.00-3.50) ÷ (3.00+3.50)/2}

Computing the figures represented in the formula:

Ed = {15 ÷ 27.5} ÷ {0.50 ÷ 3.25}

N.B: Note that the result of the change in price was negative but the absolute value is ordinarily positive.

Ed = 0.5454545455 ÷ 0.1538461538

Ed = 3.55

Decide whether the demand for paint is elastic, unitary elastic, or inelastic.

In order to determine whether the demand for the paint is elastic, unitary, or inelastic it will be necessary to determine where the point of elasticity lies when plotted along a straight line demand curve. This is arbitrarily shown below:

Straight Line Demand Curve showing the relative points of occurrence of elasticity of demand.

(Bernanke, 2003)

The price of elasticity of demand is inelastic when it is greater than 1 (Ed>1), while it is unitary when it is equal 1 (Ed=1), and elastic when it is less than 1 (Ed<1) conclusively (Herbert, 2006).

From the figure is clear that the price of elasticity of demand of paint in this scenario is elastic.