A leftward shift of the supply curve of cookies raises the price from 10 cents to 20 cents and decreases the quantity demanded from 700,000 to 500,000. What can you conclude about the elasticity of demand for cookies?

A leftward shift of the supply curve of cookies raises the price from 10 cents to 20 cents and decreases the quantity demanded from 700,000 to 500,000. What can you conclude about the elasticity of demand for cookies?

• A. The supply of cookies is elastic.
• B. The supply of cookies is inelastic.
• C. The demand for cookies is elastic.
• D. The demand for cookies is inelastic.

Answer: (D)

The key idea is how responsive consumers are to price changes. Elasticity of demand measures how much the quantity demanded changes when price changes. Here, the price doubles from 10 cents to 20 cents (a 100% increase). The quantity demanded falls from 700,000 to 500,000, a drop of 200,000 which is about 28.6%. So the elasticity of demand is roughly (-28.6%)/(+100%) ≈ -0.29. The magnitude is less than 1, meaning the quantity demanded changes only a small proportion relative to price. That is inelastic demand. Note that the leftward shift in the supply curve caused the higher price; the relevant measure is how demand responds to that price change, which shows inelastic demand.

The key idea is how responsive consumers are to price changes. Elasticity of demand measures how much the quantity demanded changes when price changes.

Here, the price doubles from 10 cents to 20 cents (a 100% increase). The quantity demanded falls from 700,000 to 500,000, a drop of 200,000 which is about 28.6%. So the elasticity of demand is roughly (-28.6%)/(+100%) ≈ -0.29. The magnitude is less than 1, meaning the quantity demanded changes only a small proportion relative to price. That is inelastic demand.

Note that the leftward shift in the supply curve caused the higher price; the relevant measure is how demand responds to that price change, which shows inelastic demand.