A local cafe recently raised its price of sandwiches from $4 to $5

The formula for elasticity of demand is Ed = ((Qd2 - Qd1 ) / Qd1) / ((P2 - P1) / P1), where Ed refers to the price elasticity of demand.

Here:

• Qd1 = Original quantity demanded
• Qd2 = Quantity demanded after the change in price
• P1 = Original price
• P2 = Price after change

Let's perform the calculations:

Ed = ((4000 - 5000) / 5000) / (($5 - $4) / $4)
Ed = (-1000 / 5000 / -$1) / $4
Ed = 20 / 25
Ed = .8

The calculated elasticity is .8, which means that for every $1 increase in price over this price range, there will be a 20% decline in the number of sandwiches sold. Because the coefficient of elasticity (.8) is less than 1, we can say that the demand is inelastic over the price range. That means that the change in quantity demanded is less than the change in price.

The revenue of the cafe was originally 5,000 sandwiches @ $4 each, or $20,000. After the change in price, the revenue was 4,000 sandwiches at $5 each, which is also $20,000.