Sally has a pizza restaurant and sells 30 pizzas for $5 each. Jim has a pizza restaurant around the corner from Sally, and he sells 30 pizzas for $5 each. If Sally and Jim both lower their price to $3, Sally’s customers will buy 60 pizzas, and Jim’s customers will buy 40 pizzas. The demand for Sally’s pizzas is more than the demand for Jim’s pizzas.

ELASTIC

Explanation:

Price elasticity of demand measures the responsiveness of quantity demanded to changes in price of the good.

Price elasticity of demand = percentage change in quantity demanded / percentage change in price

Sally

percentage change in quantity demanded : (60/30) - 1 = 1

percentage change in price : (3/5) - 1 = -0.4

Price elasticity = 1 / -0.4 = 2.5

Jim

percentage change in quantity demanded : (40/30) - 1 = 0.33

percentage change in price : (3/5) - 1 = -0.4

Price elasticity = 0.33 / -0.4 = 0.83

Sally's demand is elastic while Jims' is inelastic  

If the absolute value of price elasticity is greater than one, it means demand is elastic. Elastic demand means that quantity demanded is sensitive to price changes.  

Demand is inelastic if a small change in price has little or no effect on quantity demanded. The absolute value of elasticity would be less than one

Demand is unit elastic if a small change in price has an equal and proportionate effect on quantity demanded.  

Infinitely elastic demand is perfectly elastic demand. Demand falls to zero when price increases  

Perfectly inelastic demand is demand where there is no change in the quantity demanded regardless of changes in price.

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