Question

Table 19-2 indicates that the short-run price elasticity of demand for tires is $0.9$. If an increase in the price of petroleum (used in producing tires) causes the market prices of tires to rise from $\backslash (50$ to $\backslash )60$, by what percentage would you expect the quantity of tires demanded to change?

Short answer

The percentage expected for the quality of tires demanded to change is determined as $18$percent

Step-by-step solution

Introduction

The ratio of the percentage change in quantity demanded of a product to the percentage change in price is known as price elasticity of demand.

It expresses the idea that an economy behaves differently depending on how long it has to respond to particular inputs in economics.

Step 2

The percentage change in the amount demanded and the percentage change in the price are used to compute the price elasticity of demand.

The $\%$change in price is calculated as follows.

Percentage change in price

$=\frac{P_2-P_1}{P_1}\times 100$

Percentage change in price

$=\frac{60-50}{50}\times 100$

$=20\%$

As a result, the price change is $20$ percent. An increase in the price of petroleum from $50$ to $60$ is a $20\%$ increase.

Step 3

If the price increases by $20\%$, the percentage change in quantity demanded is computed by taking into account the specified demand elasticity and the price changes. The percentage change in quantity demanded is measured as follows.

Elasticity of Demand $=\frac{\text{Percentage change in Quantity demanded}}{\text{Percentage change in Price}}$

Step 4

When calculating demand elasticity, the percentage change in price and the amount demanded are taken into account.

By multiplying the elasticity of demand with the percentage change in price, the percentage change in quantity demanded can be computed.

Percentage change in quantity demanded$=elasticityofdemand\times \%changeinprice$

$$\begin{gathered} 0.9\times 20 \\ =18\% \end{gathered}$$

The percentage change in quantity demanded is$18$ percent when considering the percentage change in price and the elasticity of demand.