MICROECONOMICS AND MARKET SYSTEMS

Microeconomics and Market Systems Laketa A. Byrd AIU Online Unit 2 IP January 20, 2013

MICROECONOMICS AND MARKET SYSTEMS Abstract

As the economy changes and goods demanded are increased, so are the prices of those demanded goods. For example, as spring and summer arises, fall and winter goods go on clearance which causes a change in price elasticity. In this instance, the prices are lowered to make room for the higher demanded spring and summer goods, also causing a change in price elasticity. In this paper, Ill discuss the price elasticity of demand for a paint company as the price per gallon of paint increases while the usage of paint used per month decreases.

MICROECONOMICS AND MARKET SYSTEMS

Microeconomics and Market Systems The price elasticity of demand as defined by Krugman and Wells refers to the ratio of percentage changes in the quantity demanded after a price change while continuing along the demand curve and dropping the minus sign (Krugman & Wells, 2009, p. 144). In order words, price elasticity of demand measures the responsiveness of the quantity of goods demanded compared to its change in price. In the given scenario, a painter is faced with a dilemma. Initially he was paying the price of $3 for a gallon of paint and was able to purchase and use 35 gallons of it per month. Over a period of time, the price of paint has increased to $3.50 per gallon which only enables him to now purchase and use 20 gallons of paint per month as opposed to the 35 gallons he used to use. This creates a problem for the painter because his revenue is now in jeopardy. In order to understand the elasticity of paint, Ill have to calculate price elasticity by first finding out the percentage change in quantity demanded as well as the percentage change in price by using the formula of Price elasticity of demand = change in quantity percentage demanded divided multiplied by one hundred (Krugman & Wells, 2009, p. 144). Percentage change in demanded quantity = (20 new gallon usage 35 initial gallon usage) / 35 * 100 = -15 / 35 * 100 = -0.4286 * 100 = -42.86% Percentage change in demanded price = ($3.50 new price per gallon rate - $3.00 initial price per gallon rate) / $3.00 * 100 = $0.50 / $3.00 * 100 = 0.1666 * 100 = 16.67%

MICROECONOMICS AND MARKET SYSTEMS

Once I figured out the computed total percentage in quantity and prices demanded, I now have to figure out my overall price elasticity of demand by using the computed totals above. = (42.86%) / 16.67% = 2.57 price elasticity demanded As clearly shown above, the price elasticity of demand for paint is elastic for the simple fact that the demand for this product is sensitive to changes in price, not to mention the demand is greater than one (>1). Since the painter is now faced with purchasing less paint at a higher rate, this will decrease his overall revenue, but continue to increase his business expenses.

MICROECONOMICS AND MARKET SYSTEMS References

Krugman, P. & Wells, R. (2009). Microeconomics (2nd ed). New York, NY: Worth Publishers. Retrieved from http://www.worthpublishers.com