Blog Post 4 : Yanny Huang

Elasticity of Demand

Today's lesson is on elasticity of demand. The definition of elasticity of demand is the degree to which demand for a good or service varies with its price. Sales increase with drop in prices and decrease with rise in prices. Inelasticity of demand is when price goes up, consumer's buying habits stay about the same, and when the price goes down, consumers' buying habits also remain the same.
Elasticity of Demand is very important and useful when it comes to business. Many firms use elasticity of demand to fix prices of goods to be exported. For example, a country may fix higher prices for the product with inelastic demand or if it's elastic then the export country would want to fix lower prices. One of the most important role for elasticity of demand is determining the price. Quality, change of qualities, price and change of price should be consider in elasticity of demand.

One of the formula to find the elasticity of demand is (difference in quantity/quantity)/(different in price/price) which turn into % change in quantity/% change in price. Another formula is l(price/quantity) * (change in quantity/ change in price)l.
If the outcome is x>1 then it is elastic, which mean the spending goes down and it's a good idea to for the change. If the outcome is x=1, then it is unitary elasticity, which means the spending stays the same so there's no differences in changing. Lastly, if the outcome is x<1, then it is inelastic, which means the spending goes up and it's a bad idea for the changes.

Now let's do some examples.

If Holiday Inn in Maryland raises the price of their hotel rooms from $90 to $120 per night, this reduces their weekly sales from 200 rooms to 150 rooms.
A) Approximate the elasticity of demand for rooms at a price of $90 per night.
We will use the formula of l (price/quantity) * (change in quantity/ change in price) l.
Then, we will find out the change of price and change of quality.
Change of price= $30
Change of quality= 50 rooms
Input the data into the formula
E = l($90/200 rooms)* (50rooms/ $30)
E=3/4, which is .75
So E is less than 1 (.75<1). This indicates that raising the prices is elastic and it would gain more profit for Holiday Inn.

Now let's do another examples.

If Sunny Inn in Maryland raises the price of their hotel rooms from $170 to $250 per night, this reduces their weekly sales from 50 rooms to 30 rooms.
A) Approximate the elasticity of demand for rooms at a price of $170 per night.
We will use another formula for this problem.
E=((Q current- Q previous)/(Q previous))/ ((Price current- Price previous)/ Price previous))
First, lets list them
Q current= 30 rooms
Q previous= 50 rooms
P current= $250
P previous= $170
After the data, lets input them into the formula
E= ((30rooms-50rooms)/50rooms)/(($250-$170)/ $250))
E= 1.25, so E is greater than 1
This indicates that raising the price is inelastic and it would not be a good idea. The hotel would actually not gain as much profit as before.

Hopefully after this, you will have a better understanding of Elastic of Demand and would apply when it comes to business decision.