Question

A business firms sells a good at the price of Rs 450.The firm has decided to reduce the price of good to Rs 350.Consequently, the quantity demanded for the good rose from 25,000 units to 35,000 units. Calculate the price elasticity of demand.

Answer 1

P₁ = 450

P₂ = 350

Q₁ = 25000

Q₂ = 35000

Percentage change in quantity $= \frac{Q_2 – Q_1}{Q_1} \times 100$

$= \frac{35000 – 25000}{25000} \times 100$

$= \frac{10000}{25000} \times 100 = 40$ %

Percentage change in price $= \frac{P_2 – P_1}{P_1}\times 100$

$= \frac{350 – 450}{450}\times 100$

$= \frac{-100}{450}\times 100 = -22.22$ %

Price elasticity of demand $= \frac{Percentage \;change\; in \;quantity}{Percentage \;change \;in\; price}$

$= \frac{40}{-22.22} = -1.8$

The price elasticity of demand is -1.8. The negative sign shows an inverse relationship between price and quantity demanded.