The demand for fresh milk at the university farm outlet remained unchanged at 3 liters per consumer after a 25% increase from $1 per liter. Calculate the own price elasticity of demand and...
The demand for fresh milk at the university farm outlet remained unchanged at 3 liters per consumer after a 25% increase from $1 per liter. Calculate the own price elasticity of demand and interpret the value.
At least within this price range, it is clear that the demand for this particular milk is perfectly inelastic. We can determine this by using the equation for price elasticity of demand, but we can also see that this is so simply by thinking about the situation.
According to the law of demand, the quantity demanded of a product varies inversely with its price. However, the law of demand does not tell us how much it will vary. In other words, it tells us that a demand curve has a negative slope, but it does not tell us what that slope is. When demand for a product is very elastic, a small change in price causes a big change in quantity demanded. When demand for a product is very inelastic, even a big change in price causes only a small change in quantity demanded. The more the quantity demanded changes, the more elastic the demand is.
In this case, we have a large change in price, and no change in quantity demanded. Customers have bought the exact same amount even though the price has changed. This means that demand for this product is very inelastic. In fact, it means that it is perfectly inelastic (within this price range) because there was absolutely zero change.
Let us look at this using the equation for price elasticity of demand. The equation is
Price elasticity of demand = percent change in quantity demanded/percent change in price.
In this scenario, our percent change in quantity demanded is 0 while our percent change in price is 25. Therefore, our price elasticity of demand is 0/25 or simply 0. A price elasticity of demand of 0 means that the demand is perfectly inelastic. At least in this price range, the seller can change the price and the consumers will still buy the exact same amount that they bought at the previous price.