Calculate the arc price elasticity of demand for wheat in the two situations below:
The Wheat Market Farmer Brown's Wheat
Old price; $3.40/bu Old price; $3.40/bu
Old quantity; 2.5 billion bu Old quantity; 28,000 bu
New price; $3.20/bu New price; $3.20/bu
New quantity; 2.525 billion bu New quantity; 35,000 bu
Can you account for the difference in elasticities?
Elasticity of demand for wheat in the wheat market = 0.164. Elasticity of demand for Farmer Brown's wheat = 3.67. Demand for wheat in general is relatively price inelastic since it is a necessity in many production processes, for example, bread. Demand for Farmer Brown's wheat is much more price elastic since there is a large number of good substitutes for Farmer Brown's wheat, that is, the wheat produced by any other wheat farmer.
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