Question
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.
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