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What is the price elasticity of demand? How is it calculated? Question #2: The makers of academic books find that when they raise the price of the average book from $50 to $75, quantity demanded among students drops from 100 to 90. Among casual readers, quantity demanded drops from 80 to 40. a. Calculate the price elasticity of demand for each group. b. Is demand price elastic or price inelastic for each group? c. Using the determinants of demand, explain why there is a difference in elasticity for each group.

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Answer:

a. Calculate the price elasticity of demand for each group.

  • PED for students = 0.2
  • PED for casual readers = 1

b. Is demand price elastic or price inelastic for each group?

  • PED for students = 0.2, price inelastic
  • PED for casual readers = 1, unitary elastic demand

c. Using the determinants of demand, explain why there is a difference in elasticity for each group.

  • Basically, students are required to buy academic books, so their preferences will be to buy them regardless of their price, that is why their PED is price inelastic. On the other hand, casual readers will compare the price of academic books to other books (competition) and have more options where to choose from, that is why their PED is higher.

Explanation:

The price elasticity of demand shows us how a 1% change in price will affect the quantity demanded of a product.

PED = % change in Q demanded / % change in price

PED for students:

  • % change in Q demanded = (90 - 100) / 100 = -10%
  • % change in price = (75 - 50) / 50 = 50%

PED = -0.1 / 0.5 = -0.2 or |0.2| in absolute terms

PED for casual readers:

  • % change in Q demanded = (40 - 80) / 80 = -50%
  • % change in price = (75 - 50) / 50 = 50%

PED = -0.5 / 0.5 = -1 or |1| in absolute terms

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