The Price of Apples

The Price of Apples

Supply and demand is a fundamental element of Economics. We know that when the price of an item increases, then the demand will decrease. This is the Law of Demand: The higher the price, the smaller the quantity demanded, ceteris paribus (O'Sullivan & Sheffrin, 2001). Basic economics is easier to understand if you put it into that linear perspective: Scarcity equals fluctuating supply, which equals fluctuating demand. Prices increase and decrease based on the level of supply and demand. These are the basic forces which operate within the structure of economics. When discussing demand, a formula for computing the response of demand to changes in price is needed. Price elasticity of demand, or simply price elasticity, is the way we measure this change. It measures how much consumers respond in their buying decisions to a change in price (Schenk, 2002).

The formula for computing this change is as follows: elasticity equals the percentage of change in quantity divided by the percentage of change in price (e=cq/p). We will walk through the case with the apples to show the calculation of price elasticity, and then we will discuss the nature of the elasticity we calculated.

Calculation

To calculate elasticity, we first must calculate the percentage of change in demand. Here is the calculation for the apples, the demand of which decreased from 30 pounds to 21 pounds:

21-30/.5(21+30)

-9/.5(41)=-0.3529

d=-0.3529

Here we see that the change in quantity demanded is -0.3529, or -35.29 %. The demand dropped by more than 35 %. Moving on to calculate the change in price, we see the following calculation:

3.45-3=.45

.45/.5(3+3.45)=0.1395

p=0.1395

Here we can see that the price of the apples rose almost 14 %. Now that we have the necessary ingredients, we can now calculate the price elasticity. Here is the calculation:

-0.3529/.1395

e=-2.5297

Since this calculation is always between a positive and a negative number, most economists drop the negative sign (Schenk, 2002). Therefore the computation of elasticity

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