Question

A Restaurant manager decides to lower the price of a featured sandwich from Rs. 500 to Rs. 400, and she finds that sales during the week increase from 440 to 680 sandwiches. Is demand elastic or Inelastic?

Answer 1

Solution:

Price elasticity of demand (PED) =$\frac{\%\;change\; in\; quantity\; demanded}{\%\; change\; in\; price}$

% change in qty demanded =$\frac{Q_{2} -Q_{1}}{(Q_{2}+Q_{1})/2 } \times 100$

= $\frac{680 -440}{(680+440)/2 } \times 100 = \frac{240}{560} \times 100 = 42.86\%$

% change in price = $\frac{P_{2} -P_{1}}{(P_{2}+P_{1})/2 } \times 100$

= $\frac{400 -500}{(400+500)/2 } \times 100 = \frac{-100}{450} \times 100 = -22.22\%$

Price elasticity of demand (PED) = $\frac{42.86\%}{-22.22\%} = -1.93$

PED = 1.93

The demand is elastic. This is because PED is greater than one, meaning that consumers are very sensitive to sandwich price changes.