Cross Elasticity Of Demand
b. Calculate elasticity of demand for Californians for a reduction in price?
Formula of elasticity of demand with reference to price
a. 18 to 16
Price elasticity of demand = %change in quantity demanded % change in price = (10,000 – 14,000) x 100 (18 – 16) = (-4000) x 100 (2) = -2000 /100 = -20
b. 16 to 14
Price elasticity of demand = %change in quantity demanded % change in price = (14000-18000) x 100
(16-14) = (-4000) x 100 (2) …show more content…
= -20
c.
Explain whether demand for Californian is elastic or inelastic and how this would affect price and demand?
The demand for Californians is an elastic demand as the percentage change in quantity demanded is greater than the percentage change in price. Number of substitute products will influence this elasticity. Elastic demand means that demand for a product is sensitive to price changes. The affect that it would have on price and demand is that they would have an inverse relationship. Therefore, as the price of Californians increase, the demands for Californians decrease and vice versa.
d. Using Table 2, explain the idea of cross elasticity of demand for Californians. Cross elasticity shows the response of quantity demanded of one good to a change in the price of another.
CED = % change in Q demanded of good X
% change in price of good
Y
The cross-price elasticity of demand for good X when the price of good Y (competitors)changes from $14.00 to $10.00.
% change in quantity demanded = Quantity demanded (new) – Quantity demanded (old) Quantity demanded (old) = (9,000-16,200) / 16,200 = -0.444
% change in Price= Price (new) – Price (old) = (10-14) / 14 = -0.2857 Price (old)
CED = % change in Q demanded of good X = -0.444 / -0.2857 = 1.554 % change in price of good Y
The demand curve for Californians is again elastic because as the price of the competitors decrease from $14 to $10, the demand for Californians drop from 16,200 to 9,000 as the substitute is not influencing the customers of Californians. The cross elasticity of demand measures the responsiveness of the demand for a good to a change in the price of another good and is used for rival products and complimentary products. A negative cross elasticity denotes.
e. Assess whether you think Penny was right to suggest a reduction in price using your answer to (b) and total revenue calculations. I think that Penny was right to suggest a reduction in price because as shown in (b), when the price drops from $16 to $14, the quantity demanded increased from 14,000 to 18,000. In addition, the Price Elasticity of Demand proved that the demand curve for Californians is an elastic demand curve since it is not a true necessity and since the percentage change in quantity demanded is greater than the percentage change in price and because a drop in the price of competitors will decrease the demand of Californians.
Price (P) Quantity Demanded (Q) Total Revenue (P x Q)
14 18000 2,52000
16 14000 2,24000
18 10000 18,0000
20 6000 120,000
Total revenue calculations show that as the price decreases the total revenue increases, therefore by decreasing the price, Penny would have made the right decision and reducing the price a little they would be able to capture more of the market.
Formula of elasticity of demand with reference to price
a. 18 to 16
Price elasticity of demand = %change in quantity demanded % change in price = (10,000 – 14,000) x 100 (18 – 16) = (-4000) x 100 (2) = -2000 /100 = -20
b. 16 to 14
Price elasticity of demand = %change in quantity demanded % change in price = (14000-18000) x 100
(16-14) = (-4000) x 100 (2) …show more content…
= -20
c.
Explain whether demand for Californian is elastic or inelastic and how this would affect price and demand?
The demand for Californians is an elastic demand as the percentage change in quantity demanded is greater than the percentage change in price. Number of substitute products will influence this elasticity. Elastic demand means that demand for a product is sensitive to price changes. The affect that it would have on price and demand is that they would have an inverse relationship. Therefore, as the price of Californians increase, the demands for Californians decrease and vice versa.
d. Using Table 2, explain the idea of cross elasticity of demand for Californians. Cross elasticity shows the response of quantity demanded of one good to a change in the price of another.
CED = % change in Q demanded of good X
% change in price of good
Y
The cross-price elasticity of demand for good X when the price of good Y (competitors)changes from $14.00 to $10.00.
% change in quantity demanded = Quantity demanded (new) – Quantity demanded (old) Quantity demanded (old) = (9,000-16,200) / 16,200 = -0.444
% change in Price= Price (new) – Price (old) = (10-14) / 14 = -0.2857 Price (old)
CED = % change in Q demanded of good X = -0.444 / -0.2857 = 1.554 % change in price of good Y
The demand curve for Californians is again elastic because as the price of the competitors decrease from $14 to $10, the demand for Californians drop from 16,200 to 9,000 as the substitute is not influencing the customers of Californians. The cross elasticity of demand measures the responsiveness of the demand for a good to a change in the price of another good and is used for rival products and complimentary products. A negative cross elasticity denotes.
e. Assess whether you think Penny was right to suggest a reduction in price using your answer to (b) and total revenue calculations. I think that Penny was right to suggest a reduction in price because as shown in (b), when the price drops from $16 to $14, the quantity demanded increased from 14,000 to 18,000. In addition, the Price Elasticity of Demand proved that the demand curve for Californians is an elastic demand curve since it is not a true necessity and since the percentage change in quantity demanded is greater than the percentage change in price and because a drop in the price of competitors will decrease the demand of Californians.
Price (P) Quantity Demanded (Q) Total Revenue (P x Q)
14 18000 2,52000
16 14000 2,24000
18 10000 18,0000
20 6000 120,000
Total revenue calculations show that as the price decreases the total revenue increases, therefore by decreasing the price, Penny would have made the right decision and reducing the price a little they would be able to capture more of the market.