January 10th, 2018
Price Elasticity of Demand for a Painter
Elasticity of demand measures the extent to which demand is responsive to changes in price (Mankiw, 2008, p. 90). According to the law of demand and supply, consumers are expected to purchase more of a product if its price is lower. Such a perspective however does not provide the quantitative aspect of the extent to which a price decline or increase affects the demand for the product. To evaluate the extent to which consumers change their purchase of a product with a change of price, the concept of elasticity is used (Boyes & Melvin, 2007; Mankiw, 2008, p. 90). This paper evaluates the price elasticity of demand (PED) for paint, where an increase in price from $3.00 a gallon to $3.50 a gallon, leads to a decline in demand from 35 gallons to 20 gallons a month.
The PED of a product is given by the following formula:
PED = percentage change in quantity demanded ÷ Percentage change in price (Boyes & Melvin, 2007, p. 122; Mankiw, 2008, p. 91).
For paint the PED will thus be:
|Before increase||35||$ 3.00|
|After increase||20||$ 3.50|
The PED for paint is -2.57, indicating that the demand for paint is elastic. PED values range from 0 to negative infinity (Boyes & Melvin, 2007, p. 122; Duffy, 1993, p. 25). When PED falls within the zero to -1 range, the demand for that product is said to be inelastic, since the change in price does not result into significant change in the amount demanded (Boyes & Melvin, 2007, p. 122, Duffy, 1993, p. 25). Products whose PED is -1 are said to have a unit elastic demand since the change in price results into an equally proportionate change in the quantity demanded (Boyes & Melvin, 2007, p. 122, Duffy, 1993, p. 25). Finally, those products whose PED value lies between -1 and – ∞, have an elastic demand, such that a change in price results in a more than proportionate change in the quantity demanded (Boyes & Melvin, 2007, p. 122, Duffy, 1993, p. 25). Since the price change in paint results in a more than proportionate change in quantity (gallons) demanded (i.e. a PED of -2.57), the demand for paint is elastic.
Boyes, W. & Melvin, M . (2007). Microeconomics (7th ed.). Mason, OH: Cengage Learning
Duffy, J. (1993). Economics: Cliffs Quick Review. New York: John Wiley and Sons.
Mankiw, N. G. (2008). Principles of economics (5th ed.). Mason, OH: Cengage Learning