Question

A consumer buys 50 units of a good at ₹ 4 per unit. If its price falls by 25 percent, its demand rises to 100 units. Calculate its price elasticity of demand.

Answer 1

Initial Price (P₁) = ₹ 4

Price falls by 25%, so New Price (P₂) = ₹ 4 − 25% of ₹ 4 = ₹ 4 − ₹ 1 = ₹ 3

Initial Quantity (Q₁) = 50 units

New Quantity (Q₂) = 100 units

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

= `(100-50)/50xx100`

= `50/50xx100`

= 100%

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

= `(3-4)/4xx100`

= `(-1)/4xx100`

= −25%

Price elasticity of demand = `(100%)/(-25%)`

Price elasticity of demand = 4