Question

Describe each of the following situations in terms of demand elasticity. a) You have a cold and the only medicine that can help you used to cost \(\$ 1.50\) per bottle but now costs \(\$ 20.00\) a bottle. You buy it anyway. b) At \(\$ 80\) per ticket you would buy 2 tickets, but scalpers want \(\$ 100\) a seat for the Stanley cup finals, so you stay at home and watch the games on television. c) Chocolate bars double in price overnight from \(10 \$$ to \)20 \mathrm{C}$, yet you buy the same number as before.

Short answer

a) Inelastic demand: The medicine's price increased by 1233.33%, but the demand did not change (E < 1). b) Elastic demand: The ticket's price increased by 25%, and the demand decreased by 100% (E > 1). c) Unitary elastic demand: The chocolate bar's price increased by 100%, but the demand remained the same (E = 1).

Step-by-step solution

Situation a

In this situation, the price of the medicine increased from \(1.50 to \)20.00, which is a % increase of \(\frac{20-1.50}{1.50} * 100 = 1233.33%\). However, the demand did not change and the patient still buys the medicine. This indicates that the demand is inelastic, as the % change in quantity demanded is much smaller than the % change in price (E < 1).

Situation b

In this situation, the price of the tickets increased from \(80 to \)100, which is a % increase of \(\frac{100-80}{80} * 100 = 25%\). The demand for tickets decreases from 2 to 0, which is a % decrease of \(\frac{2-0}{2} * 100 = 100%\). Since the % change in quantity demanded is greater than the % change in price, the demand is elastic (E > 1).

Situation c

In this situation, the price of chocolate bars doubled from \(10 to \)20, which is a % increase of \(\frac{20-10}{10} * 100 = 100%\). However, the demand remains the same, and the consumer buys the same number of chocolate bars. This indicates that the demand is unitary elastic, as the % change in quantity demanded is equal to the % change in price (E = 1).

Key concepts

Price Elasticity of Demand

Price elasticity of demand is a measure of how the quantity demanded of a good or service changes in response to a change in its price. This concept helps to understand how sensitive consumers are to changes in price. It is calculated using the formula: \[ E_d = \frac{\% \text{ Change in Quantity Demanded}}{\% \text{ Change in Price}} \]A higher value indicates a higher sensitivity to price changes, meaning that consumers will drastically change their buying habits if the price changes. Conversely, a lower value suggests that consumer buying behavior does not significantly change with price changes. Understanding this can help businesses in pricing decisions, marketing strategies, and anticipating consumer reactions to price changes.

Elastic Demand

When demand is elastic, it means that a small change in price leads to a large change in the quantity demanded. This happens when the elasticity value \( E_d \) is greater than 1.In real-life terms, consider luxury goods or non-essential items, where a small increase in price may lead to a significant drop in demand, as consumers might opt for alternatives or forego the purchase altogether.

• If the price of a concert ticket increased from \( \(80 \) to \( \)100 \), causing you to decide not to purchase it, this is an example of elastic demand.
• Elastic demand usually occurs with goods that have readily available substitutes.

Consumers in these markets are price sensitive and are more likely to adjust their consumption patterns with price fluctuations.

Inelastic Demand

Inelastic demand occurs when a change in price results in a relatively smaller change in the quantity demanded. Here, the elasticity value \( E_d \) is less than 1.Let's understand this with an example: if a necessary medicine doubles in price, and you still buy it because there are no good substitutes, this demand is inelastic. Medical necessities, basic utilities, and fuel often fall into this category.

• With inelastic demand, even significant price changes lead to little or no changes in demand.
• This is common for essential goods where consumers have few alternative options.

Inelastic demand can lead to stable revenue for companies, as consumers continue buying despite price increases.

Unitary Elastic Demand

Unitary elastic demand exists when the percentage change in quantity demanded is exactly equal to the percentage change in price, giving an elasticity value \( E_d \) equal to 1.A practical example is buying chocolate bars, which have doubled in price, yet your purchase quantity remains the same. This indicates that the proportionate change in demand is the same as the price change.

• Unitary elasticity implies a perfectly balanced demand response to a price change.
• It's an ideal market scenario, where revenue from sales remains constant.

Understanding unitary elasticity can help businesses predict revenue and manage pricing strategies efficiently.