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Question
A consumer spends Rs 100 on a good priced at Rs 4 per unit. When its price falls by 25 percent, the consumer spends Rs 75 on the good. Calculate the price elasticity of demand by the Percentage method.
Solution
Given:
Actual Total Expenditure (TE0) Rs 100
Change in Total Expenditure (TE1) Rs 75
Actual Price (P0) Rs 4
Percentage change in price - -25
Percentage change in price = `(P_1 - P_0)/P_0 xx 100`
`= -25 = (P_1 - 4)/4 xx 100`
`(-100)/100 = P_1 - 4`
`P_1 = 3`
Therefore,
| Price (P) |
Total Expenditure (TE) = Price (P) × Quantity (Q | Quantity (Q) = `"TE"/P` |
| P0 = Rs = 4 | TE0 = Rs 100 | Q0 = 2 |
| P1 = Rs 3 | TE1 = Rs 75 | Q1= 25 |
`Ed = (-) "Percentage change in quantity demanded"/"Percentage change in price"`
`Ed = (-) ("Changeindemand"/"Actualdemand"xx100)/-25`
Ed = (-) `((Q_1 - Q_0)/Q_0 xx 100)/-25`
`Ed = (-) ((25 - 25)/25 xx 100)/-25`
`Ed = (-) (-20)/25`
∴ Ed = 0
Thus, the price elasticity of demand is 0.
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