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PART A: THE BUSINESS ORGANISATION, ITS STAKEHOLDERS AND THE EXTERNAL ENVIRONMENT 
 
96
 
Solution 
Annual demand at $1.20 per unit is 800,000 units. 
Annual demand at $1.30 per unit is 730,000 units. 
Average quantity over the range is 765,000 units. 
Average price is $1.25. 
% change in demand 
765,000
70,000

100% = 9.15% 
% change in price 
10c
125c

100% = 8%
Price elasticity of demand =
8
9.15

= –1.14 
Ignoring the minus sign, the arc elasticity is 1.14.
The demand for this good, over the range of annual demand 730,000 to 800,000 units, is 
elastic 
because the price elasticity of demand is greater than 1. Now try the following exercise yourself. 
QUESTION 
Arc price elasticity of demand
 
If the price per unit of X rises from $1.40 to $1.60, it is expected that monthly demand will fall from 
220,000 units to 200,000 units.
What is the arc price elasticity of demand over these ranges of price and output? 
ANSWER 
Monthly demand at $1.40 per unit = 220,000 units 
Monthly demand at $1.60 per unit = 200,000 units 
Average quantity = 210,000 units
Average price = $1.50 
% change in demand 
210,000
20,000
× 100% = 9.52%
% change in price 
150
20
× 100% = 13.33%
Arc price elasticity of demand = 
13.33
9.52

= –0.71% 
Ignoring the minus sign, the arc elasticity is 0.71. 
Demand is 
inelastic
over the demand range considered, because the price elasticity of demand (ignoring 
the minus sign) is less than 1. 
 
4.7 Example: point elasticity of demand 
The price of a good is $1.20 per unit and annual demand is 800,000. Market research indicates that an 
increase in price of 10 cents per unit will result in a fall in annual demand for the good of 70,000 units. 
Required 
Calculate the elasticity of demand at the current price of $1.20. 
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CHAPTER 4
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MICROECONOMIC FACTORS