Question

The owner of Christie’ Bookstore is looking into the sales of its Health & Fitness magazine section. She finds that her equilibrium is at 1000 magazines per month sold at an average price of $4.25 per magazine. When the average price of these Health & Fitness magazines rose to $4.95 each, the quantity demanded fell to 900 magazines per month, while the quantity supplied to her increased to 1250 a month.

1. Draw an appropriate diagram for Christie’s original Health & Fitness magazine market.
2. Calculate the price elasticity of demand for the Health & Fitness magazines between prices $4.25 and $4.95. Is it elastic or inelastic? How do you know?
3. Calculate the price elasticity of supply for the Health & Fitness magazines between prices $4.25 and $4.95. Is it elastic or inelastic? How do you know based on your answer?
4. Explain what factors would affect the elasticity of demand for Health &Fitness magazines.
5. Christie also notices that when the average price of the Health & Fitness magazines rose from $4.25 to $4.95, the quantity of nutritious snack bars sold at the checkout register fell by 12%. Calculate the cross elasticity of demand between the two goods. Based on your answer, are they substitutes or complements?

Answer 1

a)

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

%change in price = [(4.95 - 4.25) / 4.25] * 100 = 16.47%

%change in quantity demanded = [(900 - 1,000) / 1,000] * 100 = -10%

Elasticity of demand = -(10% / 16.47%) = -0.607

We can ignore the negtive sign here as there always exist negative relationship between price and quantity demanded. Thus elasticity of demand = 0.607 which says that demand is inelastic and consumers cannot reduce their quantity demanded by much when price rises.

c) Elasticity of supply = %change in quantity supplied / %change in price

%change in price = [(4.95 - 4.25) / 4.25] * 100 = 16.47%

%change in quantity supplied = [(1,200 - 1,000) / 1,000] * 100 = 25%

Elasticity of supply = (25% / 16.47%) = 1.51

As elasticity of supply >1, it is inelastic.

d) Factors that affect elasticity of demand:

• Availability of substitutes: If there are no substitutes available, demand would be inelastic.
• Nature of good: If good is necessary good rather than luxury, demand would be inelastic.

e) Quantity of snack bar fell by 12%

Cross price elasticity is calculated as %change in quantity of snack bar sold / %change in price of magazine

Cross price elasticity of demand = -(12% / 16.47%) = -0.72

Negative cross price elasticity of demand means that goods are complements to each other.