Question

Situation. Suppose that a pizza vendor at a basketball game can sell 3,000 slices of pizza per night at a price of OMR 3 per slice. If the vendor raises the price to OMR 4 per slice, the number of slices sold falls to 2,000. Please answer the following questions:

Q1. Calculate the PRICE ELASTICITY OF DEMAND with clear steps of working and formulae.   [4marks]

Q2. The observed value belongs to which type of price elasticity of demand? [1mark]

Q3. Describe in your own idea the demand situation and the shape of its curve in relation to the market changes.

Answer 1

a) Current quantity sold (Q1) = 3,000

Current price (P1) = 3

New quantity sold (Q2) = 2,000

New price (P2) = 4

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

%change in quantity demanded = [(P2 - P1) / P1] * 100 = [(4 - 3) / 3] * 100 = 33.33%

%change in price = [(Q2 - Q1) / Q1] * 100 = [(2,000 - 3,000) / 3,000] * 100 = -33.33%

Elasticity of demand = [33.33% / (-33.33%)] = -1 (We can ignore the negative sign here because there is always a negative relationship between price and quantity demanded). Thus elasticity of demand = 1

b) As elasticity of demand is 1, it is unitary demand.

c) It says that when price of good changes, consumers change their quantity demanded by same as percent change in price. Shape of its curve would be straight line when market changes or it could be find out from the demand equation.

Equation of demand is: Q = a - bp

Q is quantity demanded

a = Intercept of equation

b = slope

p = price

When Q = 3,000 and p = 3

3,000 = a - 3b ........ (1)

When Q = 4,000 and p = 4

2,000 = a - 4b ....... (2)

Solve (1) and (2)

3,000 + 3b = 2,000 + 4b

1,000 = b

Put value of b in either (1) or (2) , it gives a = 6,000

Equation of demand becomes: Q = 6,000 - 1,000p

As slope is 1,000, shape of curve would be straight line when market changes.