based on market demand and total expenditure

Question

Hatta Enterprises has developed a new product. The market demand for this product is given as follows:

QD = 240 - 4P

i. If the product is priced at $40, estimate the price elasticity of demand? Is demand elastic or inelastic?

(10 marks)

ii. If the product price is increased slightly from $40, what will happen to the total expenditure on the product?

(10 marks)

i have read many notes to answer this types of question but it just give me more confuse so i really need help

Answer 1

Hi Nur,

Price Elasticity of demand can be calculated using (dQ/dP) * (P/Q). Essentially this means you'll want to find the average change in quantity with respect to price and multiply this with the actual price over quantity. If you've taken calculus, dQ/dP is the same thing as the derivative of Q with respect to P.

In this equation, Qd = 240 - 4P. Take the derivative and dQ/dP= -4. Now all we have to do is plug this in with the actual price and quantity. The price is given at $40, and the quantity can be found by plugging 40 into the QD equation -

QD = 240 - 4P

QD = 240 - 4(40) = 80

Therefore Price Elasticity can be found

PED = dQ/dP * (P/Q)

PED = -4 * (40/80) = -2

Demand is elastic because the absolute value of PED is greater than 1

Because demand is elastic, an increase in the price will cause a decrease in the total expenditure on the product.