Question

Assume the price of a dress shirt was put on sale "buy one get one free". The original price was $100.00 per shirt. The sale resulted in an increase of quantity sold in the same store for the same period of time from 200 shirts to 800 shirts.

(a) Calculate the price elasticity of demand and interpret your results.

(b). If the price of the shirt is further reduced by 10%, what will happen?

Answer 1

P	Q	Change in P	Change in Q	Average P	Average Q	Ed midpt
100	200
50	800	-50	600	75	500	-1.8

The price elasticity of demand is 1.8, which means that due to a 1% change in price of the commodity, the demand will change by 1.8 percent. But because price and quantity are inversely related, a fall in price will lead to increase in quantity demanded and vice versa.

The formulas used

Change in P = New P-Old P

Change in Q = New Q-Old Q

Average Q = (OldQ+NewQ)/2

Average P = (OldP+NewP)/2

Ed mid pt = (Change in Q/Change in P)*(Average P/Average Q)

Also ED = % Change in Qty dd/%Change in Price

-1.8 = % Change in Qty dd/-10

Change in qty demanded = 18 percent, that is we can say that the demand will increase by 18 percent due to a fall in price by 10 percent.