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

$Arc elasticity =\frac{ Percentage change in demand }{ Percentage change in price}$

$Percentage change in demand = \frac{35000-25000}{(35000+25000)/2} \times100$

$= \frac{10000}{30000}\times100$

=$33\frac{1}{3}\%$

$Percentage change in price = \frac{350-450}{(350+450)/2} \times100$

$Percentage change in price =- \frac{100}{400} \times100$

$= -25\%$

Therefore Arc elasticity $= \frac{percentage change in demand}{percentage change in price}$

$=\frac{33.33} {-25}$

$= - 1\frac{1}{3}$