Price Elasticity of Demand Question and Commodity Returns Question

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achokshi

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Okay so in Schweser it tells me that the P.E.D = (change in quantity / quantity 0) / (change in price/ price 0)

However, I just got a question wrong on the 2012 CFAI Mock using that formula because it tells me P.E.D = (change in quantity / Average Quantity) / (change in price/ Average Price)
What gives??
Also, CFAI tells me this on 2012 Mock Exam:
Commodity index returns reflect the changes in future prices and the roll yield. Changes in the underlying commodity spot prices are not reflected in a commodity index.
HOWEVER, another question says this:
the three main sources of return for a commodities investment are collateral yield, roll yield, and spot price return
I understand one talks about the index and the other about investment return, but not sure how to process these two statements in my mind. I’m actually totally confused now.
 
Anybody have any ideas regarding either question? S200 magician, could you be my savior here lol?
 
bumping again in case I asked the question in a confusing way. If anything, I’d like some clarity on what price elasticity of demand formula is the correct one. Thanks ahead of time.
 
The CFA Institute text doesn’t mention what price to use in the denominator for price elacticity, but their calculations always seem to use the average price (and, correspondingly, the average demand, supply, whatever).
If you buy commodities, one source of return is the change in the spot price of the commodity. If you instead invest in commodities futures, one source of return is the change in the futures price. They’re analogous, but not identical.
 
= (change in quantity / Average Quantity) / (change in price/ Average Price)
Are they multiplying by 100? that it
Q0-Q1/((Q0+Q1)/2) * 100 / P0-P1/((P0+P1)/2) * 100
If so, that is Arc Elasticity. See page 43, Reading 13 in book 2. Now why do they do that, I’m not 100%. Did they happen to give you two points only, instead of a demand curve? That is when you typically use Arc from my reading.
 
Whether or not you multiply each value by 100 doesn’t matter; the 100s cancel.
You’re correct; the text calls it arc elasticity when you use the midpoint as the denominator in figuring out the percentage change. If you’re only given two points on the demand curve and they’re far apart (i.e., a big percentage change from one to get to the other), then it makes sense to use the midpoint; if they’re close together, it makes little difference which number you use in the denominator.
 
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