What is the price elasticity of demand
Microeconomics
You just opened a flower shop and are trying to understand pricing issues. You
were told that elasticities are very important in determining prices and what
products to supply, so you decide to investigate this concept.
You call your friend, an economics professor, and ask, “What is the price
elasticity of demand? What determines it? What is elastic and inelastic
demand?”
To really understand it, compute the following price elasticities of demand:
The price of a laptop increases by 20% and there is a 40% drop in the quantity
demanded.
The price of a pack of cigarettes increases by 10% and there is a 5% drop in
the quantity demanded.
Of the above examples, which is more elastic, and which is the least elastic?
Why? Answer the following questions:
Why is elasticity an important concept for a business?
Bridge tolls
Beachfront properties
Gourmet coffee
Gasoline
Cell phones
Now that you are an expert on elasticities, what do you think would be the
best time of year to raise prices of flowers, and why?
What do you think the elasticities are in the flower business?
