Question

The maker of lawn mowers finds that when they raise the price of a lawnmower from $50 to $75 that quantity demanded among residential customers drops from 100 to 90. Among golf course customers quantity demanded drops from 80 to 40.

a. Calculate the price elasticity of demand for each group. Show all calculations.

b. Is demand price elastic or price inelastic for each group?

c. Using the determinants of demand, explain why there is a difference in elasticity for each group.

Answer 1

a)

Price Elasticity of Demand (E_P) = Percentage in Quantity Demanded/ Percentage Change in Price

From the given question, the following figures can be ascertained -

Original price of the lawn mower = $ 50                 

New price of the lawn mower      = $ 75

Therefore,

Percentage change in price of the lawn mower = (75 – 50)/50   * 100

Percentage change in price of the lawn mower = 50                     ---------------------- (1)

Residential customers’ demand

Original quantity demanded of the lawn mower = 100

New quantity demanded of the lawn mower       = 90

Therefore,

Percentage change in the quantity demanded = (90 – 100)/100 *100

Percentage change in the quantity demanded = 10                       -------------------- (2)

                                                                                                       

Golf Course customers’ demand

Original quantity demanded of the lawn mower = 80

New quantity demanded of the lawn mower       = 40

Therefore,

Percentage change in the quantity demanded = (40 – 80)/80 *100

Percentage change in the quantity demanded = 50                        --------------------- (3)

E_P for Residential customers

E_P = Percentage change in the quantity demanded/ Percentage change in price

E_P = 10/50                (using the values calculated in (1) and (2))

E_P = 0.2

E_P for Golf course customers

E_P = Percentage change in the quantity demanded/ Percentage change in price

E_P = 50/50     (using the values calculated in (1) and (3))

E_P = 1

b)

The price elasticity of demand is said to be elastic when E_P > 1, inelastic when E_P < 1 and unitary when E_P = 1.

From our calculations, E_p is 0.2 for residential customers and 1 for golf course customers, showing that E_P is elastic for residential customers and unitary elastic for golf course customers.

For Residential customers, E_P (0.2) is Elastic --> Indicating customers are responsive to price changes

For Golf course customers, E_P (1)is Unitary Elastic --> Indicating customer’s demand changes proportionately with the price, if price changes by x%, demand will also change by x%.

c)

The price elasticity of demand is influenced by many factors such as the income of consumers, availability of substitutes and their prices, tastes and preferences, future expectation of changes in prices. If a good has close substitutes, that consumers can consider while making buying decisions, the elasticity of demand will be high for that good.

The E_P is 0.2 for residential customers, meaning that the lawn mower company has close substitutes in the market that the customers can switch to in case the prices of lawn mowers offered by the given company rises. Another factor affecting elasticity here is the fact that lawn mowers aren't an essential good for residential customers, customers can easily do without them and stop buying them when prices rise.

In the case of golf course customers, the change in price is matched by the change in quantity demanded of lawn mowers, meaning that any change in the price of lawn mowers will cause an equal change in the quantity demanded. For golf course customers, lawn mowers are needed for day-to-day maintenance activities.But since lawn mowers are a durable good, meaning they donot require to be replaced quickly and have a longer life, the quantity bought can always be reduced when the prices of lawn mowers increase. However, when the prices of the lawn mowers come down, golf course customers can easily increase the quantities bought for meeting their maintenance requirements.