Answer to Question #181868 in Microeconomics for Charlotte

Question

Suppose you are the producer of spinach carrots and beetroot and you are in a position to decide at which price you will offer these products for sale what will be your pricing strategy for each of these products in order to increase the total revenue? In your analysis you found that the price elasticity of demand for spinach is 0,4 for carrots is 1.0 and for beetroot is 1,2 explain your decision in each case

Answer 1

The coefficient of elasticity shows how much the demand will change if the price changes by 1%. Since the price and the amount of demand change (according to the law of demand) in the opposite direction to each other, the coefficient of elasticity has a minus sign, which, however, by tacit agreement, economists often omit. For example, | Ed | for electricity it equals 0.13 - this means that if the electricity tariff increases by 1%, then the demand for it will decrease by 0.13%. If the tariff increases by 10%, then the demand will decrease by 1.3%, etc.

We also recall that, depending on the degree of sensitivity of demand to price changes, five types of elasticity can be distinguished:

1. Elastic demand. Buyers are sensitive to price changes. Demand in percentage terms changes more than the price, that is, for elastic demand | Ed | > 1.0; that is, in this case, it is the elasticity of the beet.

2. Inelastic demand. Buyers are insensitive to price changes. Percentage demand changes less than price, that is, for elastic demand | Ed | <1.0; otherwise, it is the price of spinach.

3. Unit elasticity of demand. Demand in percentage terms changes in the same way as the price, that is, for this type of demand | Ed | = 1.0; in this case, it is the price of carrots.