Share
Explore BrainMass

Price elasticity of demand and revenue

Warburtons one of the largest producers of bread in the UK decided to lower bread prices by 7%. Suppose that as a result of the price decrease, the volume of bread sold by Warburtons increases by 6%. What can you infer about the own price elasticity of dmand for Warburtons bread? Can you predict how the revenues on the sales of Warburtons Crumpets would be affected? Explain.

Solution Preview

The own price elasticity of demand is define as:

Percentage change in quantity demanded divided by percentage change in price.

If it is greater than one, the product is said to be elastic. That is the percentage change in quantity demanded is larger than the percentage change in price. In other word the quantity demanded is sensitive to the change in price.

If the own price elasticity of demand is less than one, the product is said to be inelastic. That is the percentage change in quantity demanded is smaller than the percentage change in price. In other word the quantity demanded is not sensitive to the ...

Solution Summary

The own price elasticity of demand is defined as the percentage change in quantity divided by the percentage change in price. If it is greater than 1.0 it is elastic and inelastic if the value is less than 1.0. If the product is elastic, price decreases will lead to the increase in revenue and vice versa for the inelastic product.

$2.19