Case Scenario: The Rising Cost of Apples
The price elasticity of demand is a measure of the responsiveness of demand to a change in price. If demand changes by more than the price has changed, we describe the good as price-elastic. If the demand changes by less than the price has changed we describe it as price-inelastic. The following paragraphs will clarify whether the price increase of apples is elastic, inelastic or unitary.
For the last 3 months the local supermarket has been selling apples at $3.00 per pound and this month I see they've increased there price to $3.45 per pound. When the apples were $3.00 per pound I purchased 30 pounds a month, now that the price has increased I'm only able to purchase 21 pounds per month. Let's take a look at table.
Table:
Price and Total Revenue with Elastic Demand
Price Pounds of Apples Sold Total Revenue
$3.00 30 $90.00
$3.45 21 $72.45
As you can see from Table C the demand in quantity decreased when the price increased causing a negative, but the absolute value is taken and reported as a positive. Table C clearly shows the good being apples is elastic. To further clarify the apples are elastic let's look at the ARC price elasticity of demand. The arc elasticity uses the average of the initial and final quantities and the average of the initial and final prices when calculating the proportionate change in each.
Q1 = Initial quantity Q2 (21pds) - Q1 (30pds) = -9 = 0.3%
Q2 = Final quantity Q1 (21pds) + Q2 (30pds)/2 25.5
Divided
P1 = Initial Price P2 ($3.45) - P1 ($3.00) = $0.45 = 0.1%
P2 = Final Price P1 ($3.00) + P2 ($3.45)/2 $3.22
= 3% increase in/Value of Price Elasticity of Demand
A product is elastic when there is a larger percentage change in quantity and when the effect of a price increase causes revenue and quantity to decrease. A product or good is elastic when the increase in greater than 1.0%.