Question

(BusinessWeek Bloomberg). Chinese purchased 9.315 million locally made small passenger cars in 2009 when the price of the average car (Chinese Yuan) was the dollar equivalent of $17,700. Since then, car sales outlets have been slashing prices. In August 2010 Chinese purchased 13.6 million cars at average prices of Yuan equivalents of $16,250. Based on the calculations shown the price elasticity of demand for cars in China is ____________ (elastic ; inelastic) . When commenting on market outcomes an analyst in Beijing would have made this statement ,” automakers and dealers in China are expected to be ____________ ( worse off ; better off .) To confirm show method and calculations for the Ed.

Answer 1

Given,

When Price of small passenger cars, P1 = $17,700, the quantity demanded, Qd1 = 9.315 million

When Price of small passenger cars, P2 = $16,250, the quantity demanded, Qd1 = 13.6 million

Using the mid-point formula:

% change in the quantity demanded = [(Q2-Q1)/(Q1+Q2)/2] * 100 = [(13.6 million - 9.315 million)/(9.315 million + 13.6 million)/2] * 100 = [4.285 million/11.4575 million] * 100 = 37.40%

% change in the price = [(P2-P1)/(P1+P2)/2] * 100 = [($16,250-$17,700)/($17,700+$16,250)/2] * 100 = [(-$1,450)/$16,975] * 100 = -8.54%

Price elasticity of demand for small passenger cars = (% change in the quantity demanded)/(% change in the price) = 37.40/(-8.54) = - 4.38

The absolute value of the price elasticity of demand is greater than 1. Therefore, the demand is elastic in nature.

Total Revenue before price change = $17,700 * 9.315 million = $164.87 billion

Total Revenue after price change = $16,250 * 13.6 million = $221 billion

As the total revenue has increased due to the price change, the automakers and dealers in China are expected to be better off. (It is to be noted that when the demand is elastic and the prices are decreased, the total revenue increases and when the prices are increased, the total revenue decreases.)