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

The price elasticity of demand is calculated as follows;

$(E d ​ ) =(-) \frac {P} {Q} ×\frac {\Delta Q} {\Delta P}$

Given, $P=Rs.4;P1=Rs.5$

$ΔP=P 1 ​ −P=Rs.5−Rs.4=Rs.1$

$Q=25\space units ;Q_{1} =20units$

$ΔQ=Q 1 ​ −Q=(20−25)\space units=(−)5\space units$

$E d ​ =(−)\frac {4}{25} ​ ×\frac { -5}{1}$

$=-0.8$

Here the elasticity of demand smaller than 1 implies that demand is less elastic and the negative sign denotes the inverse relationship between quantity demanded and price of the commodity.