Suppose your company adopts a new technology that allows for output to increase by 12%. Suppose the elasticity of demand is -3. What percentage should you change your price by to sell all of the increased output?
| Price elasticity of demand Ed = Percentage change in quantity demanded/percentage change in price | |||||||||
| The quantity demanded will increase by 12% when the supply is increasing by 12%. | |||||||||
| (-3) = 12%/percentage change in price | |||||||||
| percentage change in price = 12%/(-3) | |||||||||
| percentage change in price = -.04 | |||||||||
| When quantity demanded increases by 12% the percentage | |||||||||
| change in price is -4%. | |||||||||
| To ensure that all the output sells, you should decrease the price by 4%. | |||||||||
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