Question

Scenario A: If the price of coffee went from $2/cup to $4/cup, and you reduced your consumption from 100 cups/month to 90 cups/month, what is the elasticity of demand? Scenario B:  If the price of coffee went from $2/cup to $4/cup, and you reduced your consumption from 100 cups/month to 40 cups/month, what is the elasticity of demand? Which scenario shows elastic demand and which shows inelastic demand?

Answer 1

Scenario A -

Price of coffee increased from $2/cup to $4/cup.

Calculate percentage change in price -

Percentage change = [(4 - 2)/2] * 100 = 100%

Quantity consumed or demaned decreases from 100 cups/month to 90 cups/month.

Calculate percentage change in quantity demanded -

Percentage change = [(90 - 100)/100] * 100 = -10%

Calculate elasticity of demand -

Elasticity of demand = % change in quantity demanded/% change in price

Elasticity of demand = -10/100 = -0.1

The elasticity of demand in Scenario A is -0.1

Scenario B -

Price of coffee increased from $2/cup to $4/cup.

Calculate percentage change in price -

Percentage change = [(4 - 2)/2] * 100 = 100%

Quantity consumed or demaned decreases from 100 cups/month to 40 cups/month.

Calculate percentage change in quantity demanded -

Percentage change = [(40 - 100)/100] * 100 = -60%

Calculate elasticity of demand -

Elasticity of demand = % change in quantity demanded/% change in price

Elasticity of demand = -60/100 = -0.6

The elasticity of demand in Scenario B is -0.6

The value of elasticity of demand is lower in Scenario A compared to Scenario B.

So, Scenario B shows elastic demand and Scenario A shows inelastic demand.