Price Elasticity of Demand

The price elasticity of demand measures the responsiveness of the quantity demanded of a product to a change in its price. It helps businesses understand how sensitive consumers are to price changes and provides insights into their purchasing behavior. The formula for price elasticity of demand is:

Price Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price)

In this case, Inox cinema reduced the price of movies from 180 to 120, resulting in an increase in sales from 300 to 500. Let's calculate the price elasticity of demand for movies using this information.

Calculating % Change in Quantity Demanded
The initial quantity demanded was 300, and it increased to 500.
% Change in Quantity Demanded = ((Final Quantity Demanded - Initial Quantity Demanded) / Initial Quantity Demanded) * 100
% Change in Quantity Demanded = ((500 - 300) / 300) * 100
% Change in Quantity Demanded = (200 / 300) * 100
% Change in Quantity Demanded = 66.67%

Calculating % Change in Price
The initial price was 180, and it reduced to 120.
% Change in Price = ((Final Price - Initial Price) / Initial Price) * 100
% Change in Price = ((120 - 180) / 180) * 100
% Change in Price = (-60 / 180) * 100
% Change in Price = -33.33%

Calculating Price Elasticity of Demand
Price Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price)
Price Elasticity of Demand = 66.67% / -33.33%
Price Elasticity of Demand ≈ -2

Interpreting the Price Elasticity of Demand
The price elasticity of demand for movies is approximately -2. This means that for every 1% decrease in the price of movies, the quantity demanded will increase by approximately 2%.

Explanation
The negative sign indicates an inverse relationship between price and quantity demanded, which is typical for most goods. In this case, as the price of movies decreased by 33.33%, the quantity demanded increased by 66.67%, showing that moviegoers are relatively responsive to changes in price.

Implications for Inox Cinema
The price elasticity of demand being greater than 1 (-2 in this case) suggests that movies are relatively elastic. This implies that Inox cinema can expect a proportional increase in sales when they reduce prices. It indicates that consumers are price-sensitive and more likely to purchase movies when the price is lower.

Conclusion
By calculating the price elasticity of demand for movies, we found that it is approximately -2. This indicates that movies are relatively elastic, and Inox cinema can expect an increase in sales when they lower prices. Understanding the price elasticity of demand helps businesses make informed pricing decisions and tailor their strategies to meet consumer demands.

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