Calculating Price Elasticity of Demand

Price elasticity of demand measures the sensitivity of the quantity demanded to changes in price. In other words, it tells us how much the quantity demanded changes when the price changes. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.

Calculation

Let us assume the initial price of the commodity is Rs.1 per unit and the consumer spends Rs.80 on it. This means the consumer has bought 80 units of the commodity.

When the price of the commodity increases to Rs.2 per unit, the consumer spends Rs.96 on it. This means the consumer has bought 48 units of the commodity.

Using the formula for price elasticity of demand, we get:

Price elasticity of demand = ((Change in quantity demanded / Initial quantity demanded) / (Change in price / Initial price))

= ((48-80)/80 / (2-1)/1)

= (-32/80) / (1/1)

= -0.4

Therefore, the price elasticity of demand for the commodity is -0.4.

Interpretation

The negative sign of price elasticity of demand indicates that the demand for the commodity is inversely related to the price of the commodity. In other words, as the price of the commodity increases, the quantity demanded decreases.

The absolute value of price elasticity of demand tells us the degree of responsiveness of the quantity demanded to changes in price. In this case, the absolute value is less than 1, which means the demand for the commodity is inelastic. This means that the change in price has a relatively small effect on the quantity demanded.

Conclusion

In conclusion, the price elasticity of demand for the commodity in this scenario is -0.4, indicating that the demand for the commodity is inelastic.