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Chapter 2

Question 1

PED
Suppose we are currently selling a product at a price of $400 with a resulting
demand of 1,000 units per annum. A marketing manager has suggested raising
the price to $420 and claims that demand will fall to 960 units.

Calculate the PED using:

(1) the non-average arc method

(2) the average arc method

Solution (1) the non-average arc method

Percentage change in price = ($420 – $400)/$400 × 100 = +5%

Percentage change in demand = (960 – 1,000)/1,000 × 100 = –4%

PED = –4/+5 = –0.8 price inelastic demand

Solution (2) the average arc method

Average price = ($400 + $420)/2 = $410

Average demand = (1,000 + 960)/2 = 980

Percentage change in price = ($420 – $400)/$410 × 100 = +4.88%

Percentage change in demand = (960 – 1,000)/980 × 100 = –4.08%

PED = –4.08/+4.88 = –0.84 price inelastic demand

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