The elasticity concept clarifies the
responsiveness of one variable to changes in another. The price of the OldTown White
Coffee's coffee mix is elastic. This means that consumers are sensitive to the
price changes of the coffee mix.
Graph 7: Elastic demand curve (Econhelp, 2010)
According to Graph 7, it
is obvious that the change in quantity demanded is
greater than the changes in price. This is because there are highly
substitutable coffee mix in the market. Since consumers can easily switch their
purchases to substitutes when the price of coffee mix changes, so consumers
will tend to buy competitor’s coffee mix instead of OldTown White Coffee
whenever it increases the price.
Assuming
that graph 7 shows the changes in price and changes in quantity demanded of
OldTown White Coffee’s coffee mix.
The price
elasticity of demand of coffee mix is shown below :
Price Elasticity of Demand = (60/60) / (3/9.5)
Price Elasticity of Demand = 1/0.3158
Price Elasticity of Demand = 3.1666
The
result shows that the price of coffee mix is elastic as the price elasticity of
demand is greater than 1 but less than infinity. This means that the percentage
decreases in the quantity demanded exceeds the percentage increase in price.
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