Question

The absolute value of the price elasticity of demand for ground beef has been estimated to be 1.0. if mad cow disease strikes the united states and a large percentage of the cattle are removed from the market, how will that affect total expenditures on hamburger, all other things equal? (hint: consider the change in meat prices.

Answer 1

Price elasticity of demand is an economic term relating to how changes in price can effect demand. If mad cow disease prevents a large amount of beef from being sold the supply for ground beef will fall. The law of supply and demand tells us when supply falls and demand is the same the price goes up. We know demand for a good that is rising in price will not stay the same and this change in demand is illustrated using the price elasticity of demand. Any good with a price elasticity of demand that is greater than 1 is considered a luxury item becuase a higher the elasticity of demand shows demand will decrease faster than the price increases. In the example of beef having a price elasticity of demand of 1 shows that price can increase by one unit and demand will decrease by one unit making the expenditures the same overtime.