Monday, May 25, 2009

Price Elasticity of Demand

Last year the price of aluminum increased due to a decrease in production (shift of the supply curve to the left). What is even more interesting is that we can calculate the world price elasticity of demand (remember since the supply curve is shifting to the left - we are in essence moving along the existing demand curve). From the article, it mentioned that price increased 5.8% and the article estimated that global quantity demand decreased 20%, giving us a price elasticity of demand of approximately 3.45, meaning that the elasticity of demand for aluminum is price elastic.

A little more recently, the fall in the median price of existing homes (5.1%) increased the demand for used (existing) homes by 15.5%. Again, since the percentage change in price is less than the percentage change in quantity demanded, existing homes are price elastic.

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