Question

Working parents with children see an increase in the price of babysitting. While they try to reduce their use of child care, they find that they have less money to spend on other goods with their budget after price increases. Explain what this says about the parents price elasticity of demand for babysitting. use charts to illustrate you answer.

Answer 1

Ans. It is clear that an increase in price of babysitting led to an increase in total expenditure of the working parents as evident from the less money they are left with for other expenditures. So, the decrease in quantity demanded of babycare has reduced by less than the increase in price i.e. for a 1% increase in price of babysitting, the quantity demanded has reduced by less than 1%. This led to increase in total expenditure on babysitting. Thus, the absolut value of price elasticity of demand which is the ratio of %change in quantity demanded to %change in price will be less than 1. Thus, the demand for babysitting will be inelastic. So, the demand curve will be steep as shown.

Suppose at initial price of P1, the quantity demanded for babysitting is Q1 and after the price increase to P2, the quantity demanded of baby sitting decreased to Q2. As shown the initial total expenditure is represented by shaded area blue + red and after the increase in price, it is represented by shaded area blue + green. It is very clear from the diagram, that the total expenditure has increased afer price increase due to an inelastic demand curve.