The price elasticity of demand measures the rate of response of quantity demanded due to a price change. To calculate the price elasticity of demand, the following equation is used:
(% Change in Quantity Demanded)
—————————————— = Price Elasticity of Demand
(% Change in Price)
In the scenario given, the price of apples increases from $3.50 a pound to $4.00 a pound. When this happens the demand for apples falls from 30 pounds of apples to only 20. By using the equation for price elasticity of demand, we can determine whether demand of apples is linked with the price, or if it is not sensitive to changes in price and is due to other outside factors. Inserting the numbers in the equation as follows yields this:
[(30-20) / 30] -.33 -33%
————————- = ——– = ——— = |2.31| = 2.31
[(3.50-4.00) / 3.50] -.14 -14%
With the information given, the price elasticity is found to be 2.31. Because this value is greater than 1, we know that the demand is price elastic. This means that the demand for apples is extremely sensitive to changes in price. Our value is far above 1 which means that the demand is extremely sensitive to changes in price. People will purchase more apples when the price is low, however when the price of the apples increases the demand decreases.
When the price elasticity of demand is exactly 1, the demand is directly linked to the price and this is known as unit elastic demand. If the price elasticity of demand is found to be less than 1, this would indicate that the demand is not affected by changes in price. Whether or not the price for the product is high or low, the demand remains unchanged.
- Goldman, A., & Sigismond, W. (2003). Business Law: Principles and Practices. Boston: Hough-ton Mifflin Company.
- O'Sullivan, A., Perez, S., & Sheffrin, S. (2006). Economics: Principles, Applications, and Tools (5th Edition). Alexandria, VA: Prentice Hall.