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The price of a good is £1.20 per unit and annual demand is 800,000 units. Market research indicates that an increase in price of 10p per unit will result in a fall in annual demand of 70,000 units. Assume that the demand curve is a straight line.
Calculate the elasticity of demand when the price is initially £1.30 and the price falls to £1.20.
In the solution, there is an assumption that the unit quantity drops down to 730,000. When I worked it out, I assumed the units remained the same at 800,000. Can you explain why I would need to assume the quantity changes and not just the price, please?
You are told that market research has concluded that “…an increase in price of 10p per unit will result in a fall in annual demand of 70,000 units.”. I don’t know why you therefore assumed that units sold remained the same when the price increased.
The whole idea of price elasticity of demand is to measure how price affects demand. Usually, as price increases demand decreases. The only time that doesn’t happen is if the goods are such necessities that people will buy the same quantities irrespective of price changes.
I understand now that one influences the other so that’s why the price would also change. That’s the bit I didn’t understand at first. Thanks!
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