Price Elasticity of Demand and Supply: Question 2

Worked solution

Part (a): Percentage changes in price and quantity demanded

Percentage change in price, using the original price of $40 as the base: $\%\Delta P = \frac{50-40}{40}\times100 = \frac{10}{40}\times100 = +25\%$

Percentage change in quantity demanded, using the original quantity of 500 as the base: $\%\Delta Q_d = \frac{350-500}{500}\times100 = \frac{-150}{500}\times100 = -30\%$

Part (b): Calculating and classifying PED

$PED = \frac{\%\Delta Q_d}{\%\Delta P} = \frac{-30}{25} = -1.2$

Ignoring the sign, the size of PED is $1.2$. Since $1.2 > 1$, demand for the earbuds is price elastic: the percentage fall in quantity demanded (30%) is proportionately larger than the percentage rise in price (25%).

Part (c): A determinant of PED

One key determinant of price elasticity of demand is the availability of close substitutes. Wireless earbuds are sold by many competing brands offering broadly similar features, so if this particular brand becomes noticeably more expensive, consumers can switch fairly easily to a rival brand instead of paying the higher price. The easier it is to switch to a substitute, the more elastic demand tends to be, which is consistent with the elastic value of $-1.2$ found in part (b).

Final answers

• (a) $\%\Delta P = +25\%$, $\%\Delta Q_d = -30\%$
• (b) $PED = -1.2$. Demand is price elastic
• (c) Availability of close substitutes (competing earbud brands) makes demand elastic