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Price Elasticity in Real Life Situations

Please help understanding elasticity in application to real life situations, instead of just theoretical.

1) If own price elasticity for demand is -0.25, what percentage would you change the price of a good to change consumption of this good by 10%? Would this change in price be an increase or decrease? Is this demand elastic, inelastic or unit elastic and why? Would the company who produces the good total revenue increase or decrease and why?

2) Which of these would have more elastic demand and why?
a) A good in an intensely competitive market vs. the only firm in the market
b) Gasoline when your tank is empty vs. gas when your tank is full
c) Salt vs. rent
d) Bottled spring water vs. water from the faucet.

Solution Preview

1) Price Elasticity of Demand (PEoD) is:
PEoD = (% Change in Quantity Demanded)/(% Change in Price) .
Applying the above formula:
0.25= 10%/(%Change in price)
% Change in Price= 10/.25
=40%
Hence price will change by 40%
If there is decrease in quantity demanded there is increase in price.
Is this demand elastic, inelastic or unit elastic and why?
When PEoD is more than 1 then it is the case of highly elastic demand and when it is less than 1 then it ...

Solution Summary

The solution determines price elasticity in real life situations.

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