At 25 cents apiece, Mrs. Brown sells 100 candies per week. If she drops her price by 20 cents, her weekly sales will increase to 110 candies per week. Is the demand for candies elastic or inelastic? Use two different approaches. I dont understand how to solve this question as i am unclear how to use the elasticity of demand equation within the numbers given.
One way to determine price elasticity of demand is to simply take the percent change in the quantity demanded and divide it by the percent change in the price of the item.
In this case, the quantity demanded rose from 100 to 110. That is a 10% increase. The price dropped from .25 to .20. That is a 25% decrease. So we then divide
.1/-.25 = -.4
Most economists simply give price elasticity of demand as a positive number (the absolute value), so we would say that the price elasticity of demand for these candies using this method is .4.
However, this method is not as accurate as the midpoint method of finding elasticity. The midpoint method is somewhat more complicated. It requires us to perform the following calculation:
[(Q2 - Q1) / ((Q1 + Q2) / 2)] / [(P2 - P1) / ((P1 + P2) / 2)]
When we plug in the numbers, we get
So, by the midpoint method, the price elasticity of demand is .82.
Whichever way the elasticity is measured, we would say that the demand for these candies is price inelastic because the elasticity is less than 1.