Question

What can you conclude about the price elasticity of demand in each of the following statements? a. "The pizza delivery business in this town is very competitive. I'd lose half my customers if I raised the price by as little as \(10 \%\)." b. "I owned both of the two Jerry Garcia autographed lithographs in existence. I sold one on eBay for a high price. But when I sold the second one, the price dropped by \(80 \%\)." c. "My economics professor has chosen to use the Krugman/Wells textbook for this class. I have no choice but to buy this book." d. "I always spend a total of exactly \(\$ 10\) per week on coffee."

Short answer

a. Elastic demand. b. Highly elastic demand, although the sample size is too small for general conclusions. c. Perfectly inelastic demand. d. Unitary elastic demand.

Step-by-step solution

Analyzing the Pizza Delivery Business

To determine the price elasticity of demand for the pizza delivery business, we apply the given situation. The owner would lose half (50%) of the customers if the prices were raised by 10%. Since the percentage change in quantity demanded (50%) is greater than the percentage change in price (10%), demand is elastic.

Understanding the Jerry Garcia Autographed Lithographs

The owner had two unique autographed lithographs and sold them on eBay. The price for the second one dropped by 80%, which indicates that the initial high demand was due to its rarity. With an 80% drop in price, presumably following an increase in quantity from 1 to 2, this suggests highly elastic demand; however, the specificity of 'two lithographs' limits the extent to which we can generalize about elasticity.

Assessing the Demand for the Textbook

Since the professor requires the Krugman/Wells textbook for class, students must purchase it regardless of the price. This scenario describes a situation of perfectly inelastic demand because the quantity demanded does not change despite a change in price.

Examining the Weekly Coffee Expenditure

The statement that the individual always spends exactly $10 per week on coffee, regardless of the price per cup, indicates that the quantity demanded changes proportionally with price. This is known as unitary elastic demand, where the percentage change in price is met with an equivalent percentage change in quantity demanded so that the total expenditure remains the same.

Key concepts

Elastic Demand

Elastic demand occurs when the quantity demanded of a product changes significantly in response to a price change. This concept is exemplified by the pizza delivery business in the mentioned scenario. When the owner contemplates a slight price increase of 10%, they expect to lose a substantial number of customers—half, in this case.

The elasticity is measured by the percentage change in quantity demanded relative to the percentage change in price. Here, a 10% price hike leads to a 50% decrease in demand; hence, the demand is considered highly elastic. Understanding elastic demand helps businesses predict potential revenue changes when considering price adjustments.

Perfectly Inelastic Demand

Perfectly inelastic demand is a situation in which the quantity demanded remains constant regardless of any changes in price. This phenomenon is rare, as it typically involves essential goods or products with no available substitutes.

An example would be the case of the Krugman/Wells textbook that is mandatory for economics students. No matter the cost, students have to purchase the textbook for their course, indicating that the quantity demanded does not change with price. In this case, the price elasticity of demand is zero, denoting perfectly inelastic demand. It's important to note that only a few products or services exhibit perfectly inelastic demand, as most goods will experience some change in quantity demanded when prices fluctuate.

Unitary Elastic Demand

Spending Patterns and Demand Elasticity

When the total amount a consumer spends on a product doesn't change despite the fluctuation in the product's price, we are dealing with a situation termed unitary elastic demand. The scenario of an individual who consistently spends \(10 on coffee weekly illustrates this concept.

Whether prices go up or down, this person adjusts the quantity of coffee they buy to maintain their \)10 expenditure. Here, the percentage change in the price is exactly offset by an equal but opposite percentage change in the quantity demanded, implying a proportionate response. Unitary elastic demand is an important concept for businesses as they weigh price changes since it directly impacts total revenue.

Quantity Demanded

Quantity demanded is a term referring to the specific amount of a good or service that consumers are willing and able to purchase at a given price. It is important not to confuse this with demand, which encompasses the entire range of quantities that would be purchased at any given price.

In the context of the four scenarios, the quantity demanded is affected differently. For instance, in the competitive pizza delivery market (elastic demand), quantity demanded decreases sharply with a price increase, while for the textbook (perfectly inelastic demand), the quantity demanded remains unchanged despite price changes. Consumers potentially exhibit different quantity demanded at each price level, which affects a firm's pricing strategy and overall market analysis.