Thursday, August 25, 2011

Panchero's and the Law of Demand

On Tuesday, we saw the law of demand in action here in Iowa City. Panchero's, a local resturant, was selling burritos for $1, which is significantly lower than the regular price. Lines of hungry burrito fans waited to purchase a burrito. Normally there are not lines out the door for burritos at Panchero's, no matter how much they are liked. So why the lines, the law of demand. As a firm lowers the price of a good/service, such as the wonderful burrito, consumers on average demand more, which is exactly what we saw downtown.

Additionally, we can hypothesize about the price elasticity of demand for the Panchero burrito. If, as the article states, Panchero sold 1200 burritos last year at a price of $1, and if they normally sell 400 at a price of say $5, then we can estimate the price elasticity of demand for a burrito and determine if the consumers are price elastic or price inelastic for burritos. In the hypothetical example the price elasticity is elastic, using the mid-point formula.

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