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Question
A consumer purchased 10 units of a commodity when its price was ₹ 5 per unit. He purchases 12 units of the commodity when price falls to ₹ 4 per unit. Calculate the price elasticity of demand for the commodity.
Solution
To calculate the price elasticity of demand (Ed), we use the following formula:
Price Elasticity of Demand (Ed) = `("Percentage Change in Quantity Demanded")/("Percentage Change in Price")`
Calculate the Percentage Change in Quantity Demanded:
Initial Quantity Demanded (Q1): 10 units
New Quantity Demanded (Q2): 12 units
Percentage Change in Quantity Demanded = `(Q2-Q1)/(Q1)xx100`
= `(12-10)/10xx100 = 2/10xx100=20%`
Calculate the Percentage Change in Price:
Initial Price (P1): ₹5 per unit
New Price (P2): ₹4 per unit
Percentage Change in Price = `(P2-P1)/(P1)xx100`
= `(4-5)/5xx100=(-1)/5xx100=-20%`
Calculate the Price Elasticity of Demand:
Ed = `(20%)/(-20%)=-1`
Since elasticity is often expressed as a positive number (ignoring the sign), the price elasticity of demand is 1.
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