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At 25 cents apiece, Mr. Krinsky sells 100 chocolate bars per week. If he drops his price to 20 cents, his weekly sales will increase to 110 bars. Is the demand for chocolate bars elastic or inelastic?

Short Answer

Expert verified
The demand for chocolate bars is inelastic, as the calculated price elasticity of demand is -0.5, which is less than 1 in absolute value.

Step by step solution

01

Calculate the percentage change in quantity demanded and price.

Let's begin by calculating the percentage change in quantity demanded and price. \(\%\ change\ in\ quantity\ demanded = \frac{(New\ quantity - Old\ quantity)}{Old\ quantity} \times 100\) \(\%\ change\ in\ price = \frac{(New\ price - Old\ price)}{Old\ price} \times 100\)
02

Calculate the percentage change in quantity demanded.

Using the given information, we have: New quantity = 110 bars Old quantity = 100 bars \(\%\ change\ in\ quantity\ demanded = \frac{(110 - 100)}{100} \times 100 = 10\%\)
03

Calculate the percentage change in price.

Using the given information, we have: New price = 20 cents Old price = 25 cents \(\%\ change\ in\ price = \frac{(20 - 25)}{25} \times 100 = -20\%\)
04

Calculate price elasticity of demand.

Now we will calculate the price elasticity of demand using the formula. \(Elasticity = \frac{\%\ change\ in\ quantity\ demanded}{\%\ change\ in\ price}\) \(Elasticity = \frac{10\%}{-20\%} = -0.5\)
05

Determine if demand is elastic or inelastic.

As our calculated price elasticity of demand is less than 1 (in absolute value): \(Elasticity = -0.5\) The demand for chocolate bars is inelastic.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Elastic and Inelastic Demand
Understanding the differences between elastic and inelastic demand is fundamental in economics. Elastic demand is characterized by a significant change in quantity demanded when the price changes, indicating that consumers are sensitive to price fluctuations. On the other hand, inelastic demand implies that quantity demanded does not respond strongly to price changes, showing that consumers are relatively unaffected by price adjustments.

For example, goods that are considered necessities, like medications, typically have inelastic demand because people need them regardless of price changes. In contrast, luxury items often have elastic demand since consumers may forego these purchases if prices rise. The exercise with Mr. Krinsky's chocolate bars demonstrates an inelastic demand, meaning a price decrease does not significantly increase the quantity demanded.
Percentage Change in Quantity Demanded
The percentage change in quantity demanded is a measurement that indicates how much the quantity of a good demanded changes in response to a change in price. To calculate this, we use the formula given in the original exercise:
\[\%\ change\ in\ quantity\ demanded = \frac{(New\ quantity - Old\ quantity)}{Old\ quantity} \times 100\]
Following this formula, the exercise showed a 10% increase in quantity demanded when Mr. Krinsky lowered his chocolate bar prices. This indicator is crucial in determining the elasticity of demand and assists businesses in decision-making processes related to pricing strategies.
Percentage Change in Price
The percentage change in price is calculated to ascertain the relative adjustment in the price of a good or service. Similar to the prior calculation, the formula is expressed as:
\[\%\ change\ in\ price = \frac{(New\ price - Old\ price)}{Old\ price} \times 100\]
In the chocolate bar scenario, there was a 20% decrease in price. Understanding this percentage helps to evaluate the potential impact of pricing modifications on demand and subsequently on sales and revenue.
Economic Principles
Several economic principles come into play when discussing price elasticity of demand. These principles suggest that consumers' purchase decisions are influenced by price changes, and understanding these changes can help businesses and policymakers predict and influence consumer behavior. The price elasticity of demand illustrates broader economic concepts such as consumer surplus, producer surplus, and the responsiveness of markets to changes in economic conditions.

Law of Demand, one of the foundational economic principles, states that there is an inverse relationship between price and quantity demanded, which we observe in the textbook exercise's chocolate bar example. However, the degree of that responsiveness—whether it's elastic or inelastic—is contingent upon a variety of factors including necessity, availability of substitutes, and proportion of income spent on the good.

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Most popular questions from this chapter

At Price \(=\$ \mathrm{q}\), quantity demanded, \(\mathrm{Q}_{\mathrm{D}}=11 .\) At Price \(=\) \(\$ 11, \mathrm{QD}=9\). Find the elasticity of demand using a) \(\mathrm{P}=9, \mathrm{Q}_{\mathrm{D}}=11\) as a base b) \(\mathrm{P}=11, \mathrm{Q}_{\mathrm{D}}=9\) as a base c) average values as a base.

Mr. Ellis sells "Buzzbee Frisbess" door-to-door. In an average month, he sells 500 frisbees at a price of \(\$ 5\) each. Next month, his company is planning an employee contest whereby if any employee sells 1,000 frisbees, he will receive an extra two weeks vacation with pay. Never one to work too hard, Mr. Ellis decides that instead of trying to push \(\$ 5\) frisbees on unwilling customers for 12 hours a day, he will maintain his normal work schedule of 8 hours each day. His strategy is to lower the price which he charges his customers. If demand elasticity, \(\mathrm{e}=-3\), what price should Mr. Ellis charge in order to sell 1000 "Buzzbee Frisbees." Use average values for \(\mathrm{P}\) and \(\mathrm{Q}\).

If demand is inelastic, total revenue increases as price increases. If demand is elastic, total revenue decreases as price increases. In the case of supply, total revenue does not depend upon elasticity. Why?

Below are given the prices in two different months for a product and the corresponding quantities demanded. But we do not know whether the price rose from \(\$ .80\) to \(\$ 1.00\) or fell from \(\$ 1.00\) to \(\$ .80 .\) Show how each assumption will give a different answer for elasticity of demand and how using average values will alleviate this problem. $$ \begin{array}{|l|l|} \hline \text { Price } & \text { Quantity demanded } \\ \hline \$ 1.00 & 4000 \\ \hline \$ .80 & 5000 \\ \hline \end{array} $$

What is meant by cross elasticity of demand?

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