Unit 2 Individual Project Deliverable Length: 1–2 Pages

Unit 2 Individual Project Deliverable Length: 1-2 page Word document

Suppose you are a painter, and the price of a gallon of paint increases from $3.00 a gallon to $3.50 a gallon. Your usage of paint drops from 35 gallons a month to 20 gallons a month. Perform the following: Compute the price elasticity of demand for paint and show your calculations. Decide whether the demand for paint is elastic, unitary elastic, or inelastic. Explain your reasoning and interpret your results.

Paper For Above instruction

The concept of price elasticity of demand is central to understanding how consumers respond to changes in the price of a good or service. It measures the responsiveness, or elasticity, of the quantity demanded to a change in price. When analyzing the demand for paint in this scenario, it is essential to quantify this responsiveness through calculations of the price elasticity of demand, determine whether the demand is elastic, inelastic, or unitary, and interpret the implications of the results.

Given the details, the initial price of a gallon of paint was $3.00, which increased to $3.50. Concurrently, the quantity demanded decreased from 35 gallons to 20 gallons. To compute the price elasticity of demand (Ed), we use the midpoint (arc elasticity) formula, which provides a more accurate measure by averaging quantities and prices over the initial and final points:

Ed = [(Q2 - Q1) / ((Q2 + Q1)/2)]] / [(P2 - P1) / ((P2 + P1)/2)]

Plugging in the values:

  • Q1 = 35 gallons
  • Q2 = 20 gallons
  • P1 = $3.00
  • P2 = $3.50

Calculating the numerator (percentage change in quantity demanded):

[(20 - 35) / ((20 + 35)/2)] = (-15) / (55/2) = -15 / 27.5 ≈ -0.545

Calculating the denominator (percentage change in price):

[$3.50 - $3.00) / (($3.50 + $3.00)/2)] = $0.50 / ($3.25) ≈ 0.154

Now, dividing these two values to find the elasticity:

Ed = -0.545 / 0.154 ≈ -3.54

The negative sign indicates the inverse relationship between price and quantity demanded, which is typical for most goods. Considering the absolute value, |Ed| ≈ 3.54.

Since the absolute value of the price elasticity of demand exceeds 1, the demand for paint in this scenario is classified as elastic. This means that consumers, or in this case, the painter, are quite responsive to price changes; a 1% increase in price results in approximately a 3.54% decrease in quantity demanded.

The elasticity of demand has important implications. When demand is elastic, a price increase can lead to a proportionally larger reduction in quantity demanded, potentially decreasing total revenue. Conversely, lowering prices could significantly increase the quantity demanded, thereby increasing revenue or sales volume in a competitive market. In the context of a painter's demand for paint, the elastic nature suggests that even small increases in paint prices can substantially reduce usage, impacting the painter’s costs and profitability.

In conclusion, the calculated price elasticity of demand for paint in this scenario is approximately 3.54, indicating elastic demand. The high sensitivity of demand to price changes highlights the importance for suppliers and consumers to consider price fluctuations carefully, as they can lead to significant shifts in consumption behavior. Understanding elasticity helps businesses and individuals predict how changes in prices might affect their costs, revenues, or consumption patterns, which is vital for making informed economic decisions.

References

  • Mankiw, N. G. (2021). Principles of Economics (9th ed.). Cengage Learning.
  • Pindyck, R. S., & Rubinfeld, D. L. (2018). Microeconomics (9th ed.). Pearson.
  • Frank, R. H., & Bernanke, B. S. (2021). Principles of Economics (8th ed.). McGraw-Hill Education.
  • Krugman, P., & Wells, R. (2018). Microeconomics (5th ed.). Worth Publishers.
  • Perloff, J. M. (2019). Microeconomics (8th ed.). Pearson.
  • Simon, C. P., & Blume, L. (2020). Mathematics for Economics and Finance: Methods and Models. Springer.
  • Samuelson, P. A., & Nordhaus, W. D. (2010). Economics (19th ed.). McGraw-Hill Education.
  • Rosen, H. S., & Gayer, T. (2018). Public Finance (11th ed.). McGraw-Hill Education.
  • Hubbard, R. G., & O'Brien, A. P. (2018). Microeconomics (6th ed.). Pearson.
  • Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach (9th ed.). W. W. Norton & Company.

Related Assignments