25%/10% = 2.5
(ii) the price elasticity of demand for visits to the cinema is -2.3
Price elasticity of demand is defined as the meausre of responsiveness in the quanity demanded for a good as a result of change in price of the same good. Namely, it is percentage change in quantity demanded as per the percentage change in price of the same good. In economic terms it is a mesaure of the sensitivity of quanitiy demanded to changes in price. It is measured as elasticity, becuase it measures the relationship as the ratio of percentage changes between quantity demanded of a good and changes in its price. The formula for Price elasticity of demand is
PED = (% Change in Quantity Demanded)/(% Change in Price). If a good has a PED < 1 then it is an inelastic good; demand is not sensitive to price changes. Namely if the price of the cinema tickets increases demand will stay the same, this is mainly due to the fact that the cinema doesn’t have many substitutes. Although rental DVD’s could account for the cinema they aren’t the same. Therefore because the cinemas has a PED of -2.3 it his highly inelastic, thus consumers will continue visiting the cinema because there isn’t anything good enough to act as its substitute. In response to a 10% increase in price, the quantity of a good demanded stays the same by -23% therefore the price elasticity of demand would be :
-23%/10% = -2.3
- The cross elasticity of demand for visits to the cinema with respect to the rental payment of pre-recorded video films is +3.8
The cross elasticity of demand measures the quantity demanded for one good in response to a change in price of another good. Therefore if the price for cinema tickets decreases then demand for pre-recorded videos would decrease, similarly if the price of cinema tickets increased the demand for pre-recorded videos would increase. The cinema and rental videos are substitues of eacother, therefore they have an XED 0>, this is apparent as the XED of demand for visits to the cinema with repsec to the rental payment of pre-recorded video films is +3.8. This can be calculated by the formula used to calculate XED = (% Change in demand for good Y)/(% Change in price of good X ). Therefore if for example the % change in demand for good Y is 38% and the % change in price of good X is 10% then it would have a cross elasticity demand of +3.8.
- the cross elasticity of demand for visits to the cinema with respect to the price of popcorn sold in the cinema is -1.0.
As explained previously for cross elasticity of demand an XED > 0 determines that the goods are substitutes, however in this case the cinema and popcorn are complements of each other because they have an XED < 0. The fact that they are complements reinforces the idea that if the price of popcorn increases the demand for the cinema will decrease, considering that when consumers go to the cinema they eat popcorn. Therefore if the price of one good increases the demand for the complement good decreases. If the cinema ticket prices increased, people wouldn’t demand popcorn because without the cinema ticket they don’t have access to the popcorn. An XED of -1.0 can be calculated through the formula XED = (% Change in demand for good Y)/(% Change in price of good X ). Therefore if the % change in demand for popcorn is 10% and the % change in the price of cinema tickets is -10% the XED will be -1.0.