Elasticity - Should We Raise the Price?

Elasticity is a measure of responsiveness. The price elasticity of demand measures the rate of response of quantity demanded due to a price change.

-Example of price elasticity of demand

A toy factory lowers the price of robot toys from $10 to $9 and finds that weekly quantity demanded of the robot toys goes up from 50 per week to 67.

1. Calculate the percentage changes in price and quantity demanded.

     - Percentage changes in price

       : 1/10 x 100 = 10%

     - Percentage changes in quantity demanded

       : 17/50 x 100 = 34%

2. Calculate the price elasticity of demand for the robot toys.
    - 34%/10% = 3.4   (elastic)

3. Calculate the change in total revenue that the robot toys will  experience following the fall in price.
    -Original total revenue: 10*50 = 500
    -Change total revenue: 9*67= 603
    - Increase 103 total revenue





4.Draw a “revenue box” diagram to illustrate the effect on quantity demanded and total revenue following the price change for the robot toys.
 - Left picture






5. Was a factory sensible to lower the price of the robot toys? Explain your answer.
- Yes, because the toy factory can increase more total revenue in lower price than higher price.