Suppose the price of apples rises from $3 a pound to $3.45 and your
consumption of apples drops from 30 pounds of apples a month to 21
pounds of apples. Calculate your price elasticity of demand of apples.
What can you say about your price elasticity of demand of apples? Is
it Elastic, Inelastic, or Unitary Elastic?

I need help with the calculations and how you achieved it.

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Clarification of Question by kana2-ga on 18 Jun 2005 07:57 PDT

I actually need the answer by midnight EST June 18, 2005.

Hi kana2!!


The price elasticity of demand measures the responsiveness of quantity
demanded to a change in price, with all other factors held constant.

Definition:
The price elasticity of demand E(D), is calculated using the following formula: 

                            % change in quantity demanded 
E(D) = Absolute value of (----------------------------------)
                                 % change in price 

Where:
% change in quantity demanded = 100 * (Q_New - Q_Old) / Q_Old
and
% change in price = 100 * (Price_New - Price_Old) / Price_Old


The price elasticity of demand measures the rate of response of
quantity demanded due to a price change.
The value of E(D) has a mean; if the proportionate change in quantity
demand is greater than the correspondent proportionate change in price
this means that the demand varies in a greater rate than the prices
do, and the E(D) results greater than 1. When the proportionate change
in quantity demand is lower than the correspondent proportionate
change in price this means that the demand varies in a lower rate than
the prices do, and the E(D) results lower than 1.
Summing up:

If E(D) > 1 then Demand is Price Elastic (Demand is sensitive to price changes)

If E(D) = 1 then Demand is Unit Elastic

If E(D) < 1 then Demand is Price Inelastic (Demand is not sensitive to
price changes)


Now the problem can be solved easily:
% change in quantity demanded = 100 * (Q_New - Q_Old) / Q_Old =
                              = 100 * (21 - 30) / 30 =
                              = 100 * (-9) / 30
                              = -30%

% change in price = 100 * (Price_New - Price_Old) / Price_Old =
                  = 100 * ($3.45 - $3.00) / $3.00 =
                  = 100 * $0.45 / $3.00 =
                  = 15%

E(D) = Absolute value of (-30% / 15%) = 2 > 1

The price elasticity of demand of apples is elastic, it is sensitive
to price changes in a rate of 2 to 1 (when prices vary x%, the demand
decreases 2x%).


I hope that this helps you. Feel free to request for a clarification
if you need it.

Regards.
livioflores-ga

Thank you.

Kana2, it looks like you are in my ECO class. I just did thi sassignment.  :)))

Cmon this is a homework question!