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.

Answer 1

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) xx 100`

= `(12 - 10)/10 xx 100`

 = `2/10 xx 100`

=  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) xx 100`

= `(4 - 5)/5 xx 1001`

= `(-1)/5 xx 100`

= −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.