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Question
Consider the demand for a good. At price Rs 4, the demand for the good is 25 units. Suppose the price of the good increases to Rs 5, and as a result, the demand for the good falls to 20 units. Calculate the price elasticity.
Solution
Percentage change in quantity demanded:
`% ΔQ = (Q2 - Q1)/(Q1)xx100`
`% ΔQ = (20 - 25)/(25)xx100`
`% ΔQ = (-5)/(25)xx100`
`% ΔQ = -20%`
Percentage change in price:
`% ΔP = (P2 - P1)/(P1)xx100`
`% ΔP = (5 - 4)/(4)xx100`
`% ΔP = 1/(4)xx100`
`% ΔP = 25%`
Calculating Price Elasticity of Demand:
PED = `(%ΔQ)/(%ΔP)`
PED = `(-20%)/(25%)`
PED = −0.8
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