The price elasticity of demand measures the responsiveness of the quantity demanded of a good or service to changes in its price.
For instance, consider a family that typically purchases 6 cartons of milk every month when the price is $4 per carton. However, when the price increases to $5 per carton, they reduce their consumption to 5 cartons.
The first step to calculate the price elasticity of demand is determining the percentage change in quantity demanded. This can be calculated as (5-6)/6 * 100 = -16.67%.
Next, the percentage change in price must be calculated. This comes out to be (5-4)/4 * 100 = 25%.
Finally, the price elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in price, which gives -16.67% / 25% = -0.67.
For a 1% increase in price, there is a 0.67% decrease in quantity demanded. This suggests that milk is an essential commodity for this family, and they are not very responsive to price changes.
From Chapter 2:
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