Price elasticity of demand is the measurement of a change in goods demanded with the price change. If the change is far from the original point, it is referred to as being elastic; simultaneously, if there is little change in the relationship between purchases and price change, we refer to it as being inelastic.
For this problem, I will use arc elasticity which is similar to the simpler price elasticity of demand (PED) but adds in the index problem. Arc elasticity uses a midpoint between the two points of a curve to measure the elasticity of a commodity.
To calculate PED, we first calculate the two midpoints.
Midpoint Quantity (Q) = (Q1 + Q2) / 2
Midpoint Price (P) = (P1 + P2) / 2
Therefore, Q = (25,000 + 35,000) / 2 = 30,000
P = (450 + 350) / 2 = 400
Next, we calculate PED using the ordinary formula:
PED = % Change in Quantity (Q2-Q1) / Midpoint Q divided by % change in Price (P2-P1) / Midpoint P =
=(35,000 - 25,000) / 30,000 divided by (350 - 450) / 400 = 0.33 / -0.25 = -1.32
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