Question

The price of organic apples falls, and apple growers find that their revenue increases. Is the demand for organic apples elastic or inelastic?

Short answer

The demand for organic apples is elastic.

Step-by-step solution

Understand Elastic and Inelastic Demand

The elasticity of demand measures the percentage change in the quantity demanded of a good due to a one percent change in price. If the percentage change in quantity demanded exceeds the percentage change in price, then the demand for that good is considered elastic. On the contrary, if the percentage change in quantity demanded is less than the percentage change in price, then the demand for that good is considered inelastic.

Identify Price and Revenue Relation

In this scenario, the price of organic apples falls and the revenue increases. This implies that the quantity of apples sold increases by a greater percentage than the decrease in price.

Determine the Elasticity of Demand

Given that the percentage increase in quantity demanded is greater than the percentage decrease in price, it can be concluded that the demand for organic apples is elastic.

Key concepts

Price Elasticity

Price elasticity of demand is a concept that helps us understand how sensitive the quantity demanded of a good is to its price. When economists talk about **elasticity**, they're examining how changes in price impact the demand for that product. Here's a simple breakdown:

• If demand is elastic, a small change in price leads to a large change in the quantity demanded. People respond significantly to price changes.
• Conversely, if demand is inelastic, even significant price changes cause only a small change in the quantity demanded. People still want about the same amount, regardless of price shifts.

For organic apples, understanding whether the demand is elastic or inelastic helps farmers predict how their revenue might change with price adjustments.

Revenue

Revenue, quite simply, is the money businesses earn from selling their products. Calculating revenue involves multiplying the price of a good by the quantity of that good sold: Revenue = Price x Quantity Sold.
When exploring revenue in the context of price elasticity, it becomes clear that how price changes affect revenue depends on elasticity:

• If demand is elastic, lowering prices typically increases total revenue because it greatly boosts the quantity demanded.
• In contrast, if demand is inelastic, reducing prices might decrease revenue because the increase in quantity demanded is not enough to offset the decrease in price.

In the case of organic apples, when the price falls and revenue increases, it's an indication that demand is elastic. This means that consumers buy significantly more when prices drop.

Organic Apples

Organic apples are a popular choice among health-conscious consumers looking for pesticide-free produce. These apples typically come with a higher price tag due to the labor-intensive farming process required to maintain organic certifications.
The demand for these apples can vary greatly with price changes because of their unique position in the market. Many consumers are not only seeking an apple but are specifically looking for the organic label. This distinction plays a big role in understanding the elasticity of demand for these products.
If the demand for organic apples is elastic, as concluded in the exercise, farmers can strategically decrease prices to increase their sales volume and revenue, capitalizing on consumer sensitivity to price changes.

Quantity Demanded

The concept of quantity demanded reflects how much of a product people want to buy at a given price. It changes as product prices change, influenced by how appealing the product is in the current market.
For organic apples, the quantity demanded is a key element in analyzing the exercise. When prices fall for these apples and the quantity demanded rises significantly, we notice the responsive consumer behavior, hinting at an elastic demand.

• Understanding the quantity demanded helps predict how market dynamics like price changes will affect sales.
• For organic apple growers, knowing that lowering the price can significantly increase demand (and thus revenue) is essential for financial planning and making informed pricing decisions.

This flexibility in quantity demanded highlights how sensitive the consumer market for organic apples is to price modifications.