Price Elasticity of Demand

Topics: Supply and demand, Price elasticity of demand, Elasticity Pages: 4 (1130 words) Published: October 25, 2007
Price Elasticity of Demand

T's Jean Shop sells designer jeans. The latest trend setter has been Capri cuffed blue jeans. The demand for the Capri jeans has been very high with teenagers and young women. The business has increased its supply of Capri jeans due to the high demand. The owner, Terri Johnson, contemplates increasing the price from $9.00 to $10.00. Ms. Johnson needs to know the response of the consumers to the increased price. According to McConnell and Brue (2004), the Price Elasticity of Demand measures the rate of response of quantity demanded due to a price change (p. 1). Using Price Elasticity of Demand

In calculating the Price Elasticity of Demand, we use the formula:

percentage change in quantity
demanded of product X
Ed =percentage change in price
of product X

The percentage change in quantity demanded is divided by the percentage change in price.

change in quantity demanded of X
Ed =original quantity demanded of X
change in price of X
original price of X

According to Economics.about.com, there is another way to view this equation (www.economics.about.com). The equation is:

The percentage of change in quantity demanded is:
[QDemand(NEW) - QDemand(OLD)] / QDemand(OLD)
The percentage of change in price is:
[Price(NEW) - Price(OLD)] / Price(OLD)

T's Jean Shop original price for the Capri jeans was $9.00 and the new price is $10.00. So we have the Price (OLD) = $9.00 and Price (NEW) = $10.00. The quantity that has been demanded for the $9.00 is 150 and the increased price of $10.00 is 110. When you go from $9.00 to $10.00 you have QDemand(OLD)= 150 and QDemand (NEW) = 110, where QDemand is short for Quantify Demanded. So now the equation is

Price(OLD) = 9
PRICE(NEW) = 10
QDemand(OLD) = 150
QDemand(NEW) = 110

The percentage change in quantity demand and...
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