Case Summary
The price of a gallon of paint increases from $3.00 a gallon to $3.50 a gallon. The painter’s usage of paint drops from 35 gallons a month to 20 gallons a month.
The price elasticity of demand for paint
The concept of price elasticity of demand for a commodity is of great essentiality in economics as it shows how much the demand for a commodity will change as a result of price deviations. In other words, it shows how the demand for the commodity responds to a price change. There are three common methods that are used in the computation of price elasticity namely; Total revenue method, the Geometrical method, and the Arc method. As for this case, the arc method will be used to determine the price elasticity of demand of the painter since it is most appropriate. Based on the formula;
Price elasticity of demand = % change in quantity demanded/% change in the price of the commodity
= ((35 -20)/ (35 x 100)/((3.5- 3.0)/ 3.0) x 100
= 42.86%/16.67%
=2.5
Therefore the price elasticity of demand for the paint is 2.5.
The demand for paint: elastic, unitary elastic, or inelastic
In deciding whether the type or nature demand for the paint the results of the computation are checked and used to make the decision. In the case the result of the computation is a figure greater than one, then the demand is price elastic meaning that it responds largely to changes in price. This can be further explicated by concluding that the percentage change in demand for an elastic situation is higher than the percentage change of price of the same commodity thus referred to as price elastic.
In a situation where the resulting figure computed equals one, then the demand is therefore defined as unit elastic or rather unitary elasticity whereby a price change will have no effect on the demand. This situation mostly happens in monopolistic markets whereby the commodity has no substitutes. Lastly, is the situation whereby the figure computed is less than one to mean that a change in price has a lesser effect on the demand thus inelastic demand. In this case, the demand for the commodity is less responsive to price changes. As for the case of the paint, the resulting figure is 2.5 which is greater than one hence the demand is price elastic.
Results interpretation
Since the demand for the paint is price elastic, it means that the demand for the paint will change by 2.5 times depending on the change in the price of the paint. That is if the price goes up, the demand falls by 2.5 and if the price goes down, the demand increases by 2.5. As a result, the total revenue is subsequently affected by the changes in price and demand. This happens because the total revenue is a factor of price and demand whereby the quantity demanded of a commodity is the same as total sales of the same commodity.
Further interpretation of these results could indicate that this commodity, the paint, is found in a perfectly competitive market whereby demand and supply are the key players of the equilibrium price and quantity. In addition to this, paint is a normal good that has substitutes and compliments hence the reason why its demand being price elastic.