Calculate the price elasticity of demand for the product if an increase in its price from Rs.20 to Rs.22 leads to a decline in the quantity demanded from 100 units to 80 units.

Solution

Given, Q1 = 100 Q2 = 80 P1 = 20 P2 = 22   Price Elasticity of Demand (PED) = % change in Quantity Demanded​ / % change in Price   to Calculate: % change in Quantity Demanded = (Q2 – Q1) / Q1                                                             = (80 -100) / 100 = -20%   to Calculate: % change in Price = (P2 – P1) / P1                         = (22 -20) / 20 = 10%   to calculate Price elasticity: PED = -20% / 10% = -2   Please note: ·        The negative sign shows the inverse relationship between price and quantity demanded (Law of Demand). ·        The absolute value = 2, which is greater than 1, so demand is elastic.