If timber prices fall by 30%, what will be the expected % change in demand for timber in the economy if the Price Elasticity of Demand is -0.5, and explain the effect on revenue for a timber-selling firm.
Price Elasticity of Demand (PED) is a measure of the responsiveness of demand to a change in price. A PED of -0.5 suggests demand is price inelastic – as Price falls by 1%, Demand will increase by 0.5% (less than 1%).
PED is calculated by the % change in Demand over % Change in Price. This means that % Change in Demand = % Change in Price x PED. In this case, % Change in Demand = -0.5 x -0.3 = 0.15 = a 15% increase in demand for timber. We show the effect on revenue on a diagram.
HC
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