Question

Consider the demand for a good. At price Rs 4, the demand for the good is 25 units. Suppose 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?

Answer 1

Price Elasticity of demand is given by percentage change in quantity divided by percentage change in price.

Percentage change in quantity$= \frac{Q_2-Q_1}{(Q_2+Q_1)/2}\times100$

$= \frac {20-25}{(20+25)/2}\times100$

$=-22.22$ %

Percentage change in price:$=\frac{ P_2-P_1}{(P_2+P_1)/2}\times100$

$=\frac{5-4}{(5+4)/2}\times100$

$=22.22$ %

Price Elasticity $= \frac{-22.22}{22.22}= -1$