Question

The quantity demand of a commodity at price ₹ 8 per unit is 600 units. Its price falls by 25% and quantity demanded rises by 120 units. Calculate price elasticity of demand. Is its demand elastic?

Answer 1

Initial Price (P₁) = ₹ 8

Price falls by 25% → New Price (P₂) = ₹ 8 − 25% of ₹ 8 = ₹ 8 − ₹ 2 = ₹ 6

Initial Quantity (Q₁) = 600 units

Increase in Quantity = 120 units → New Quantity (Q₂) = 600 + 120 = 720 units

% Change in Quantity Demanded = `(Q_2 - Q_1)/Q_1xx100`

= `(720 - 600)/600 xx 100`

= `120/600xx100`

= 20%

% Change in Price = `(P_2 - P_1)/P_1xx100`

= `(6 - 8)/8xx100`

= `(-2)/8xx100`

= −25%

Price elasticity of demand = `(20%)/(-25%)`

= −0.8