Chapter 46, Problem 4CYU

To determine

The percentage change in demand if prices is increased by $0.05. Also, the changed price elasticity.

Explanation of Solution

Given Information:

Price elasticity of demand 1.20

Price is $0.50

Current consumption level is 100,000

Calculation:

  $\text{Price elasticity}=\frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in price}}$

Firstly, price elasticity will be determined which is as follows:

  $\begin{array}{c}\text{Percentage change in price}=\frac{\text{Change in price}}{\text{Initial price}}\times 100\\ =\frac{\$0.05}{\$0.50}\times 100\\ =10\%\end{array}$

Since, price elasticity is given and percentage change in price is computed then percentage change in demand will be calculated using following formula:

  $\begin{array}{c}\text{Price elasticity}=\frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in price}}\\ 1.2=\frac{\%\text{ change in quantity}}{10\%}\\ \text{\% change in demand}=1.2\times 10\%\\ =12\%\end{array}$

Therefore, if price is increased by 10% then quantity demanded will be decreased by 12%.

The quantity demand will be reduced by 12000. The price elasticity will be computed as follows:

  $\begin{array}{c}\text{Percentage change in quantity}=\frac{\text{new value}-\text{previous value}}{\text{Average value}}\times 100\\ =\frac{12000}{100,000}\times 100\\ =12\%\end{array}$

Price elasticity will be same as % change in quantity is 12% and % change in price is 10%. Therefore, price elasticity will be 1.2 (=12%/10%)

Economics Concept Introduction

Demand and Supply: Demand refers to the curve that depicts the relationship between the quantity demand at given price whereas supply refers to the curve that depicts the relationship between the quantity that supplier is ready to sell at given price.