Understanding Price Elasticity of Demand Through Skateboard Sales

When it comes to understanding market dynamics, the concept of price elasticity of demand (PED) can sometimes feel like a fuzzy ball of numbers and formulas. But it doesn't have to be! Let’s break this down with a relatable example: skateboards.

Imagine the price of a skateboard shoots up from $200 to $300. Ouch, right? Due to this price hike, the number of skateboards sold drops from 10 units to 7. So, what does this mean in terms of price elasticity? You might ask, “How do we measure this?” Well, it’s not as daunting as it seems.

Firstly, we use this handy formula: Price Elasticity of Demand (PED) = (Percentage Change in Quantity Demanded) / (Percentage Change in Price).

Got it? Great! Now, let’s work through the numbers together.

It All Starts with Quantity

We need to figure out how the quantity sold has changed. The initial quantity of skateboards is 10, and the new quantity is 7. Now, let’s do the math:

• Change in quantity = New Quantity - Initial Quantity = 7 - 10 = -3 units.

Woah! A drop of 3 units. So, what’s our percentage change in quantity? Here’s the formula:

• Percentage Change in Quantity = (Change in Quantity / Initial Quantity) × 100
• It’s simple!
• Percentage Change in Quantity = (-3 / 10) × 100 = -30%.

On to Price

Now let's tackle the price changes. The initial price was $200, and now it's $300. This is a big jump, so let's calculate the change:

• Change in price = New Price - Initial Price = 300 - 200 = $100.

Next, we need the percentage change in price:

• Percentage Change in Price = (Change in Price / Initial Price) × 100
• So, we’ll have: Percentage Change in Price = (100 / 200) × 100 = 50%.

Putting It All Together

Now, here’s the fun part: plugging these values into our formula for price elasticity of demand:

• PED = Percentage Change in Quantity / Percentage Change in Price
• PED = (-30%) / (50%) = -0.6.

But wait! When we convert -0.6 to a fraction, we get -3/5. So, what does this number tell us? Essentially, it shows that the demand for skateboards is relatively inelastic, meaning that even with a significant price hike, the quantity demanded doesn’t drop drastically—at least not enough to classify it as highly elastic.

Why This Matters Even More

Understanding this concept can revolutionize how businesses set their prices and forecast sales. Think about it: if skateboards have a price increase but still sell decently, manufacturers might not be as afraid to raise prices. When it comes to aspects like the ACCA Advanced Performance Management (APM) exam, grasping the subtleties of PED can give you a solid leg up in handling real-world scenarios.

So next time you're out shopping for a skateboard or studying for your ACCA exam, remember this interplay of price and demand. It’s more than just numbers— it’s an essential pillar of economic understanding that plays a role in everything from tiny businesses to global markets.