Economics – The allocation of resources - Price elasticity of demand (PED) | e-Consult
The allocation of resources - Price elasticity of demand (PED) (1 questions)
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(a) Calculation of PED:
Change in Quantity Demanded = 80 - 100 = -20 litres
Original Quantity Demanded = 100 litres
Change in Price = 7 - 5 = £2
Original Price = £5
PED = (-20 / 100) / (2 / 5) = (-0.2) / (0.4) = -0.5
Therefore, the price elasticity of demand is -0.5.
(b) Interpretation of PED Value: A PED of -0.5 indicates that the demand for this coffee is inelastic. This means that the percentage change in quantity demanded is less than the percentage change in price. Consumers are not very responsive to changes in price; they will continue to buy roughly the same quantity of coffee even if the price changes.
(c) Other Factors Influencing Quantity Demanded:
- Consumer Income: If consumer income increases, they may be more willing to buy coffee, even if the price increases.
- Consumer Tastes and Preferences: If coffee becomes more fashionable or consumers develop a stronger preference for it, the quantity demanded will increase, regardless of price.