Principles of Microeconomics: The price elasticity of demand

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You just opened a flower shop and are trying to understand pricing issues. You were told that elasticities are very important in determining prices and what products to supply, so you decide to investigate this concept.

You call your friend, an economics professor, and ask, “What is the price elasticity of demand? What determines it? What is elastic and inelastic demand?”

To really understand it, compute the following price elasticities of demand:

• The price of a laptop increases by 20% and there is a 40% drop in the quantity demanded.
• The price of a pack of cigarettes increases by 10% and there is a 5% drop in the quantity demanded.

Of the above examples, which is more elastic, and which is the least elastic? Why? Answer the following questions:

• Why is elasticity an important concept for a business?  
  • Bridge tolls
  • Beachfront properties
  • Gourmet coffee
  • Gasoline
  • Cell phones

Now that you are an expert on elasticities, what do you think would be the best time of year to raise prices, and why? 

What do you think the elasticities are in the flower business?

Please submit your assignment.

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