1.calculate the price elasticity of demand when the price was increased from R25 to R40 ? (10)
2.is a price increase the correct decision to raise revenue?substantiate your answer using the price elasticity of demand and income elasticity of demand concepts? (30)
3.using examples explain how demand,price elasticity,and total revenue are all related to each other.explain this relationship using at least two examples that incorporates all three concepts? (30)
4.evaluate the various factors that affect the price elasticity of demand?justify your answer (30)
All of them
plants
The answer of number one is 1.25
(Q2-Q1\Q2+Q1)\(P2-P1\P2+P1)
25000-100000÷100000×100=75000÷100000×100=75%.45-25÷25×100=15÷25×100=1500÷25=60%.75÷60=5÷4=1,25
Then number of substitute availabe.the proportion of income that is spent on goods.
1. To calculate the price elasticity of demand, we need two pieces of information: the percentage change in quantity demanded and the percentage change in price.
First, we calculate the percentage change in quantity demanded:
Quantity demanded at the initial price (Q1) = 10 units
Quantity demanded at the new price (Q2) = 5 units
Percentage change in quantity demanded = [(Q2 - Q1) / Q1] * 100
= [(5 - 10) / 10] * 100
= -50%
Next, we calculate the percentage change in price:
Initial price (P1) = R25
New price (P2) = R40
Percentage change in price = [(P2 - P1) / P1] * 100
= [(40 - 25) / 25] * 100
= 60%
Now, we can calculate the price elasticity of demand:
Price elasticity of demand = (Percentage change in quantity demanded) / (Percentage change in price)
= (-50%) / (60%)
= -0.833
So, the price elasticity of demand when the price was increased from R25 to R40 is -0.833.
2. To determine whether a price increase is the correct decision to raise revenue, we need to consider the price elasticity of demand and income elasticity of demand.
Price elasticity of demand measures the responsiveness of quantity demanded to changes in price. If demand is elastic (elasticity > 1), then a price increase would lead to a decrease in total revenue because the decrease in quantity demanded would outweigh the increase in price. Conversely, if demand is inelastic (elasticity < 1), a price increase would lead to an increase in total revenue due to the smaller decrease in quantity demanded compared to the increase in price.
Income elasticity of demand measures the responsiveness of quantity demanded to changes in income. If the income elasticity of demand is positive and greater than 1 (income elastic), then a price increase may be a correct decision to raise revenue, as increased income would lead to increased quantity demanded and potentially offset the effects of the price increase. However, if the income elasticity of demand is negative or less than 1 (income inelastic), a price increase may not be the correct decision since the increase in price would have a stronger negative impact on quantity demanded.
Substantiating the answer would require specific values for the price elasticity of demand and income elasticity of demand, which are not provided in the question.
3. Demand, price elasticity, and total revenue are all related to each other. The price elasticity of demand (PED) can help us understand the impact of changes in price on total revenue.
When demand is elastic (PED > 1), a decrease in price leads to a proportionately larger increase in quantity demanded. As a result, total revenue increases since the percentage increase in quantity demanded outweighs the percentage decrease in price. Conversely, an increase in price leads to a proportionately larger decrease in quantity demanded, resulting in a decrease in total revenue.
For example, if the price of a good decreases by 10% and the quantity demanded increases by 20% (elastic demand), the total revenue would increase (20% increase in quantity > 10% decrease in price).
On the other hand, when demand is inelastic (PED < 1), a decrease in price leads to a proportionately smaller increase in quantity demanded. Therefore, total revenue decreases since the percentage decrease in price outweighs the percentage increase in quantity demanded. An increase in price leads to a proportionately smaller decrease in quantity demanded, resulting in an increase in total revenue.
For example, if the price of a good increases by 10% and the quantity demanded decreases by 5% (inelastic demand), the total revenue would increase (5% decrease in quantity < 10% increase in price).
Thus, the relationship between demand, price elasticity, and total revenue is such that the elasticity of demand determines the impact of price changes on total revenue.
4. Various factors can affect the price elasticity of demand:
a) Availability of substitutes: The more substitutes available for a product, the higher the price elasticity of demand. When consumers have many alternatives to choose from, they are more likely to switch to cheaper substitutes if the price of a particular good increases.
Example: If the price of a specific brand of coffee increases significantly, consumers may switch to other brands or types of coffee, making the demand more elastic.
b) Necessity vs. luxury: Necessities tend to have inelastic demand as they are essential products, and people are less willing to reduce consumption even when prices rise. On the other hand, luxury goods tend to have more elastic demand as consumers have more flexibility to decrease consumption when prices increase.
Example: The demand for basic food items like rice and bread is less responsive to price changes compared to the demand for high-end luxury items like expensive cars.
c) Time period: The length of time consumers have to adjust their behavior affects the price elasticity of demand. In the short term, demand tends to be more inelastic as consumers may not have enough time to find substitutes or change their purchasing habits. In the long term, demand becomes more elastic as consumers can make adjustments to their consumption patterns.
Example: After a significant increase in gas prices, consumers may continue to purchase fuel in the short term as they need it for daily commute, but in the long run, they may start exploring alternative modes of transportation, making the demand more elastic.
d) Income level: The price elasticity of demand can vary based on income levels. Products with a higher proportion of expenditure in consumer budgets tend to have more elastic demand among lower-income groups compared to higher-income groups. Low-income individuals are more sensitive to price changes and may change their consumption patterns more readily.
Example: A sudden increase in the price of basic food items may result in more significant changes in the purchasing behavior of low-income households compared to high-income households.
These are some of the factors that can affect the price elasticity of demand, illustrating that the demand for a product can vary in its responsiveness to changes in price.