Question

The price elasticity of demand for cat food is -0.4 and the price increases by 6%.  

        a.   How much will sales of cat food change?  Show your work.

        b.   What will happen to consumer expenditures on Purina cat food?  Explain.

Answer 1

a) Given,

                        Price elasticity of demand = -0.4

                             Change in prices           = 6%

We have,

Price elasticity of demand = [% change in Quantity demanded]/ [% change in prices]

                     Thus, -0.4 = [% change in Quantity demanded]/6%

[% change in Quantity demanded] = -0.4*6% = -2.4%

NB: Here, the negative value indicates that with increase in prices, the quantity demanded would decline.

Hence, we can say that the sales of cat food would decrease by 2.4%

b) In the given case, it is said that the price has been increased by 6% with a price elasticity of demand of -0.4%. Thus, by calculation we have obtained that the quantity demanded has declined by 2.4%.

· This means that the demand of the consumers has been declined by a factor which is less than the price increase.

· This represents the relative inelastic behaviour of the consumer expenditure

· A price elasticity of demand less than one means that the consumer pattern would be relatively inelastic, which means that the buying patterns would not vary much.

· A price elasticity of demand = 1 implies a perfectly elastic condition where the quantity demanded would be proportionate to the price changes and a price elasticity of demand = 0 implies a perfectly inelastic condition where the consumer patterns will not change with changes in the price levels

                                             Thus, from the above analysis, we can conclude that the Consumer expenditure on the Purina cat food would decline with an increase in the price rate. In the given case, it would decline by 2.4% owing to a price increase of 6% and price elasticity of demand of -0.4.