The Demand for Alcohol of Price Elasticity

1. Calculating Price Elasticity of Demand

The price elasticity of demand can be calculated by applying the formula:

Price elasticity of demand = Percentage change in quantity demanded/ Percentage change in price

Ed = % ?q / % ?p

Ed = ?q /q / ?p/ p

To calculate the price elasticity of demand, we need to know the quantity demanded of a commodity at two different prices, when all other relevant things remain the same. To calculate the price elasticity of demand, we express the change in price as a percentage of the average price and the change in the quantity demanded as a percentage of the average quantity. By using the average price and average quantity, we calculate the elasticity at a point on the demand curve midway between the original point and the new point.

There are three types of elasticity of demand like elastic, relatively more elastic and relatively less elastic. Further there are also two extreme type of elasticity like perfectly elastic and perfectly inelastic demand.

Elasticity along a Linear Demand Curve

Elasticity and slope are not the same. A linear demand curve has a constant slope but a varying elasticity.  At the midpoint of a linear demand curve, the price elasticity of demand is one. At prices above the midpoint, demand is elastic. At prices below the midpoint, demand is inelastic. If demand is elastic the revenue remain same after the change in price whereas if demand is less elastic revenue move in same direction with price change. But if demand is more elastic revenue will move in opposite direction as price change ( Fogarty J, 2006).

2. There are three main determinants of elasticity of demand

• Substitute
• Income
• Time elapsed

Substitutes: The demand is more elastic, the closer substitutes the commodity or service has. There are different examples of substitute such as gasoline has no close substitutes. Therefore, the demand for gasoil is inelastic. On the other side, wheat is a close substitutes for rice, hence the demand for rice is elastic. However, the degree of substitutability be determined by narrow (or broad) definition of a commodity.

Moreover, necessities like food and shelter has a poor substitute and important for human wellbeing so their demand is inelastic. Whereas, luxuries such as exotic vacations has many substitutes, one of which is not buying it. Subsequently, a luxury usually has an elastic demand.

Income: the larger the proportion of income, a consumer consumed on a commodity, the demand is more elastic for it. For instant, consider the elasticity of demand for tea and car. If the price of tea increase, you may not change the demand of tea and kept is same. So, your demand for tea is inelastic. However, if the price of car is double, you may postpone the purchasing of car. Therefore, your demand for car is more elastic. What is the reason of it, because you spent a large proportion of income on car on the other side, u spent a small part of income on tea.

Time Elapsed: the demand of commodity will be a more elastic, the longer the time that has passed as a change in price. Once the price of oil uplifted by 400 percent in the course of the 1970s, people hardly altered the quantity of oil and gasoline they purchased. Nonetheless slowly, as new effective auto and airplane engines were established, the quantity purchased reduced. The so, the demand for oil became more elastic as more time passed since the massive price climb.

3. The price elasticity of demand is calculated by the measure the percentage change in quantity demanded by dividing the percentage change in price of product. The formula is presented as below

Elasticity of demand =Percentage change in quantity demanded / percentage change in price ( McAllister P, 2010).

In this question, the given change in the price of commodity is $6 and the average of the two prices changes is $18, as a result the percentage change in the price of commodity is ($6/$18) *100, which equals to 33.3 percent. However, the quantity demanded is raised by 30 percent. The price elasticity of demand equals

ED= (30.0 percent)/ (33.3 percent), or 0.90. By using the data provided in the question, the estimated price elasticity of demand is approximately 0.90 %.

According to the information, the demand is inelastic, as a result, if other things remaining the same, the reduction in price will be responsible for a reduction in the total revenue of Universal Music. Nevertheless, CDs and downloading of music are substitutes for each other and the music that was downloaded increased in quantity considerably. Successfully, the music downloads price decrease because majority of individuals had internet availability and they download from numerous sites. Therefore, the reduction in the price of the substitute such as downloaded music, drops the CDs demand of Universal Music, consequently decision to reduce prices of universal Music’s CDs most probably was mandatory because of (predicted) decline in CDs demand.

4. The price of ITunes song per download raised to $1.29 from 99 cent. This change in price is equal to 30.0% ((1.29-0.99)/0.99)*100. Whereas, in the same week, after the reduction in price by 30 %, the quantity demanded of 33 iTunes songs that were downloaded, reduced 35 per cent for each download. On the other hand, the elasticity in the price for chocolate sauce demand can be measured because the change in each percent of chocolate sauce demand is divided by the price percentage change of chocolate sauce. The formula is presented as below

Demand Elasticity = change percent in the demand quantity/ change per percent in price

Ed = % ?q / % ?p

ED = 35 % / - 30 % = 1.17

By using the information in the given question, we find estimated price elasticity equal to 1.17 (approximately) which indicated that price elasticity of iTunes songs download is more elastic 1 percentage increase in price of iTune song download decreased the quantity demanded of iTune song by 1.17. Nevertheless, due to more elastic demand of iTune song the decision of reduction in price of 33 songs per download will decrease the total revenue of the iTune song company. Because total revenue in opposite direction as price increased by the company because of more elastic demand.

5. The elasticity in the price of chocolate sauce demand can be measured because the change in each percent of chocolate sauce demand is divided by the price percentage change of chocolate sauce (Danes J, 2012). The formula is stated as follows.

Demand Elasticity = change percent in the demand quantity/ change per percent in price

By using the information given in the question,

ED=10%/-5%= 2

Demand elasticity (ED) equals (10 percent)/ (?5 percent), which is equal to 2.0. Whereas, the cross elasticity of price can be estimated by each percent alteration in the demand of commodity A by dividing each percent alteration in the price of commodity B (complementary or substitute).

Cross demand Elasticity = change percent in the demand quantity of A/ change per percent in price of B

Consequently, ice cream demand “cross” elasticity with chocolate sauce can be examined by finding per percent alteration in  ice cream quantity  demand and dividing it to the per percent alteration in  chocolate sauce price.

EDC=15%/-5%= 3

Through use of data given in question cross demand elasticity equals (15 percent)/ (?5 percent), which is equal to ?3.0. Ice cream and chocolate sauce are complements. This information described that chocolate sauce and ice cream are complementary goods as a reduction in chocolate sauce price increase the quantity of ice cream that is demanded. The cross price elasticity is more elastic which show that little price reduction leads greater ice cream quantity demand.

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