Question

If the price elasticity of demand for restaurant meals is less than 1, will total spending on them rise or fall if the wage of waiters falls? [15 points]

Answer 1

Price Elasticity of Demand (PED) means it is the percentage change in quantity demanded in response to a 1% change in price when all other determinants of demand are held constant

Formula for Calculating Price Elasticity of Demand (PED)

PED = % Change in Quantity Demanded / % Change in Price.

The law of demand states that there is an inverse relationship between price and demand for a goods. The numerical value of PED coefficent could range from 0 to infinity. In general terms demand for goods is inelastic when the PED is less than 1. That is change in price have a less than propotional effect on the quantity of goods demanded. The demand of goods is elastic when the price elasticy of Demand is greater than 1.

In your question price of elasticity of demand for resturent meals is less than 1. That means this indicates that Price Elasticity of Deman is inelastic. This is not ideal situation of the restuarant for the profit making demand will be drop down will effect the total profitabiltiy of the organisation. If the wages of waiters falls then there is some sort of relief in overall profitabiltiy of the business that expenditure should down will help in improve the profitablity of the business.  

There are number of facters which determinds the Price eleasticity of deman. Let us discuss in below:

In the situation of Price increase PED > 1 = Revenue fall PED < 1 = Reveue Rises PED =1 = Revenue Constant

In the situation of Price Decrease PED>1 = Revene Rises PED <1 = Revenue falls PED = 1 = Revenue constant

The factors that decided total fall in the spending inclues when the cost of labors is large share of the total cost of production. If the wages labour cut will adversely effected the fall in the total spending and leads to the total revenue rise for the resturant. If the wages is cut down means its adversely effect to the other expenditure factors like bonus and incentrives which can also be reduced drastically will help to fall in the total spending to increase the total revenues fo the restaurant

Conclusion

For the above said information it's clearly show the varience of price will effect the elasticity of demand. It is very important that Price elasticity of demand should kept in for deriving the revenue in constant position.