Answer to Question #159291 in Microeconomics for Rooshan

Question

When a flower shop raised the price of a floral arrangement from $20 to $28, the number of the arrangements sold decreased from 30 a week to 20. What is the price elasticity of demand for the flowers in this case?  

Answer 1

Price elasticity of demand (PED) is the percentage change in quantity demanded of a commodity due to certain percentage change in its price.

PED = %change in quantity demand/%change in price

Mid point of quantity = $\frac{(Q1 + Q2)} {2}=\frac{ (30 + 20)} {2} = 25$

Mid point of price =$\frac{(P1 + P2)} {2}= \frac{(20 +28)} {2} = 24$

%change in quantity = $\frac{(Q2 - Q1)} {Mid point quantity}= \frac{(20 - 30)} {25} = -0.4$

%change in quantity = $\frac{(P2 - P1)} {Mid point price}= \frac{(28 - 20)} {24} = 0.3$

Price Elasticity of Demand =$\frac{ -0.4} {0.3} = 1.3$

Total Revenue (TR) = Total Quantity $×$ Price per unitTotalQuantity$×$ Priceperunit

Initial TR = $Q_1×P_1 = 30 ×20 = 600$

Present TR = $Q_2×P_2 = 20 × 28 = 560$

The total revenue of the firm dropped from $600 to $560