Question

5. a) A survey found that price elasticity of demand for mobile phones varied greatly among different age groups, with people over 40 having an average price elasticity of 1.1, whereas people under 25 had an average price elasticity of 0.7. i) Briefly explain what do these figures mean? ii) Briefly explain why these different age groups have different elasticities.

Answer 1

Price elasticity of demand refers to percentage change in quantity demanded to percentage change in price.The elasticity can be inelastic,neutral and elastic.It indicates how responsive the demand is with respect to change in prices.

Elastic refers to when percentage change in quantity/percentage change in price is greater than 1.

Inelastic refers to when percentage change in quantity/percentage change in price is less than 1.

Here, the price elasticity of demand is more than 1 in case of people over 40 meaning they are very responsive with change in prices of mobile phones and will demand less if price rises or vice versa

Whereas, in case of people under 25, the price elasticity of demand is less than 1 which means they are less responsive with change in prices and will be indifferent to change in prices.

These different groups have different elasticities because it depends on various factors such as:

Taste and Preferences- the young generation is more tech savvy and likes to flaunt their gadgets as we see every year,the phone companies keeps increasing the prices but it doesn't affect the demand as more and more people,majority of whom are in the yooung age group, wants to keep them updated with the latest trend so they usually care less about the price. Also they have less liabilities which we will discuss in the next part.

The people over 40 age group is when people have dependants such as kids,parents and they want to save money for future use or have already invested money in the stock market or they have various other liabilities such as home loan,tuition fees which requires them to save money and spend it in line with their budget constraints so they will be very responsive to increase in prices.A slight change in technolgy won't be a big issue for them when they already have to make the investment decisions regarding so many factors.