If the elasticity of demand for peaches is -1.76 and the elasticity of demand for apples is -1.59, then consumers are
The correct answer and explanation is:
Answer:
Consumers are more sensitive (more elastic) to price changes in peaches than in apples.
Explanation:
Elasticity of demand measures how much the quantity demanded of a good responds to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. The price elasticity of demand is usually negative because price and quantity demanded typically move in opposite directions (law of demand). However, we often discuss the absolute value to interpret elasticity.
In this case:
- Elasticity of demand for peaches = -1.76
- Elasticity of demand for apples = -1.59
Both values are greater than 1 in absolute terms, which means the demand for both peaches and apples is elastic. This implies that consumers respond strongly to price changes: a 1% price increase leads to more than a 1% decrease in quantity demanded.
Comparing the two elasticities:
- The absolute value of the elasticity for peaches (1.76) is greater than that for apples (1.59).
- This means consumers reduce their quantity demanded of peaches by a larger percentage than apples when prices rise by the same percentage.
In other words, demand for peaches is more elastic than demand for apples. Consumers are more sensitive to price changes for peaches than apples.
Why might this be?
- Substitute availability: If there are more close substitutes for peaches than apples, consumers will switch away from peaches more readily if the price increases, leading to higher elasticity.
- Necessity vs luxury: Apples might be viewed as more of a staple or necessity than peaches, making demand for apples less elastic.
- Habit or preference: Consumers may have stronger preferences or habits that make them less responsive to price changes in apples.
- Proportion of income spent: If peaches take a larger share of a consumer’s budget, they may be more price sensitive.
Understanding these elasticities helps producers and sellers make better pricing decisions. For peaches, because demand is highly elastic, a price increase might lead to a large drop in sales and total revenue. For apples, price changes might affect quantity demanded less drastically.