if the price elasticity of demand for a cup of tea is equal to 3, how would you interpret this result?
To interpret a price elasticity of demand of 3 for a cup of tea, you can use the following steps:
1. Understand the concept of price elasticity of demand: Price elasticity of demand measures the responsiveness of demand for a product to a change in its price. It indicates how sensitive the quantity demanded is to changes in price.
2. Calculate the price elasticity of demand: The formula for price elasticity of demand is:
Elasticity = (Percentage change in quantity demanded) / (Percentage change in price)
For example, if the price of a cup of tea increases by 10% and the quantity demanded decreases by 30%, the price elasticity of demand would be:
Elasticity = (-30% / 10%) = -3
Note that the negative sign is usually ignored when interpreting the elasticity, so it would be interpreted as 3 in absolute terms.
3. Interpret the value of elasticity: The interpretation of price elasticity of demand values depends on whether they are elastic or inelastic:
a. Elastic demand (Elasticity > 1): When the absolute value of elasticity is greater than 1, it indicates that demand is elastic. In this case, a small change in price leads to a proportionately larger change in quantity demanded. For example, if the price of a cup of tea increases by 10% (-3 elasticity), the quantity demanded would decrease by 30%.
b. Inelastic demand (Elasticity < 1): When the absolute value of elasticity is less than 1, it indicates that demand is inelastic. In this case, a change in price leads to a proportionately smaller change in quantity demanded. For example, if the price of a cup of tea increases by 10% (-0.5 elasticity), the quantity demanded would decrease by 5%.
In your case, since the price elasticity of demand for a cup of tea is equal to 3, it indicates that demand is elastic. This means that relatively small changes in price will result in larger changes in the quantity demanded. For example, if the price of a cup of tea increases by 10%, the quantity demanded would decrease by approximately 30%.