Ab 3

Assignment Activity Unit3
By
Nang San Poung
Given information,
 Data on Price Elasticity of Demand (PED): Emma finds that if the price of a specific
clothing item increased from $50 to $60, the quantity demanded decreased from 150 units
per month to 100 units per month.
 Data on Income Elasticity of Demand (YED): Emma also collected data on her
customers' monthly income and noticed that the average income increased from $3,000 to
$3,500 per month. During this period, the quantity demanded of clothing items increased
from 150 units per month to 180 units per month.
 Data on Cross-Price Elasticity of Demand (XED): Emma noticed that a competitor's
boutique, located nearby, reduced the price of a similar clothing item from $55 to $50,
and during this period, the quantity demanded of her clothing item decreased from 150
units per month to 130 units per month.
Question 1.
The concept of price elasticity of demand is a measure used in economics to quantify how the
quantity demanded of a good or service will respond to a change in its price.
The price elasticity of demand = percentage change in quantity demand/percentage change
in price
= -40% / 18.18%
= 2.2%
a. As a result, the demand for the item is price elasticity because the price elasticity is greater
than one.
b. Emma’s Boutique is facing the elastic demand for its products, which means that the
customers are quite sensitive to changes in prices. In this situation, reducing prices is the best
option to increase the quantity demanded by implementing discount sales or promotions to
attract customers. Lowering prices can stimulate demand and increase sales volume.
Although the per-unit profit margin may decrease due to lower prices, the increase in sales
volume can compensate for the reduction, resulting in higher total revenue.
Question 2.
Income elasticity of demand is a concept that measures the responsiveness of the quantity
demanded of a good or service to a change in consumer income.
Income elasticity of demand = Percentage change in quantity demand / percentage change in
income
=18.18% / 15.38%
=1.18%
a. The income is elastic and it indicates that the good is a luxury good. If consumers are
highly sensitive to changes in their income levels, it means that small changes in income
can lead to significant changes in their purchasing behavior. If their pay rises, they will
purchase more luxury goods. Conversely, if their pay decrease, their demand for luxury
goods will decrease.
b. Emma can use the information mentioned above to grow the business in many ways. She
can identify her target market with different income levels. In addition, the information
can inform Emma of the price elasticity of her products. She can also focus on product
development and innovation. For instance, she can invest in developing upscale
variations or new product lines to cater to that demand. Furthermore, understanding the
income elasticity can also help market expansion and diversification.
Question 3
The cross-price elasticity of demand = percentage change in quantity demand for Emma’s
Boutique /
Percentage change in price of the competitor
= -14.28% / - 9.5%
= 1.5%
a. Based on the calculation, Emma’s clothing item and the clothing item of her
competitor’s boutique can be considered substitutes as positive indicate substitutes.
b. There are several ways that Emma can use to make pricing strategies and stay in a
competitive market. First, she can set competitive prices according to the demand for
her products and adjust the price to maintain and capture the market share. As her
product is a substitute for a competitor's product, she might consider adjusting her
prices slightly lower to attract customers. Furthermore, understanding the cross–price
elasticity can help her to forecast the demand and can help her to differentiate
between her products form competitors.
Reference:
Shapiro, D., MacDonald, D., Greenlaw, S. A., Dodge, E., Gamez, C., Jauregui, Andres., Keenan, D.,
Moledina, A., Richardson, C., & Sonenshine, R. (2023). Principles of microeconomics (3rd ed.)

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Assignment Activity Unit3

The price elasticity of demand = percentage change in quantity demand/percentage change

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