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Consumer spends Rs 1500 on a good priced at Rs 10 per unit. When price rises by 20 % , the consumer continues to spend Rs 1500 on that good. Calculate price elasticity of demand by % change method. Class 11 micro economic?
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Consumer spends Rs 1500 on a good priced at Rs 10 per unit. When price...
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Method to Solve :
Let’s define the original price: P1 = 8
and the original quantity: Q1 = 125 (because 1000/8 = 125)
The price rises by 25%, which is an extra Rs 2, so the new price is: P2 = 10
As the budget constraint of Rs 1000 has not changed, we assume they now spend it all on the product at the new price, so the new quantity will be: Q2 = 100 (because 1000/10 = 100).
So we have P1 = 8; p2 = 10; Q1 = 125; Q2 = 100
Elasticity is % change in quantity divided by % change in price, which can be written as:
E = [(Q2-Q1)/Q1] / [(P2-P1)/P1]
E = [(100–125)/125] / [(10–8)/8]
E = [-25/125] / [2/8]
E = -0.2/0.25
E = -0.8
The negative sign is normal due to the negative relationship between quantity demanded and price.
I personally tend not to use the percentage method, I prefer:
E = [Change in Q]/[Change in P] / [P*Q]
which works out as:
E = (-25/2) * (8/125) = -200/250 = -0.8.
This question is part of UPSC exam. View all Class 11 courses
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Consumer spends Rs 1500 on a good priced at Rs 10 per unit. When price...
Calculation of Price Elasticity of Demand
The price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in its price. It is calculated using the percentage change method.
Given data:
Initial price (P₁) = Rs 10 per unit
Initial expenditure (E₁) = Rs 1500
Price increase = 20%
Calculating initial quantity:
Initial quantity (Q₁) = E₁ / P₁
Q₁ = 1500 / 10 = 150 units
Calculating new price:
New price (P₂) = P₁ + (P₁ * 20%)
P₂ = 10 + (10 * 0.20) = Rs 12
Calculating new quantity:
New quantity (Q₂) = E₁ / P₂
Q₂ = 1500 / 12 = 125 units
Calculating percentage change in quantity:
Percentage change in quantity = [(Q₂ - Q₁) / Q₁] * 100
Percentage change in quantity = [(125 - 150) / 150] * 100
Percentage change in quantity = (-25 / 150) * 100
Percentage change in quantity = -16.67%
Calculating percentage change in price:
Percentage change in price = [(P₂ - P₁) / P₁] * 100
Percentage change in price = [(12 - 10) / 10] * 100
Percentage change in price = (2 / 10) * 100
Percentage change in price = 20%
Calculating price elasticity of demand:
Price elasticity of demand = (Percentage change in quantity / Percentage change in price)
Price elasticity of demand = (-16.67% / 20%)
Price elasticity of demand = -0.833
Therefore, the price elasticity of demand for the good is -0.833, indicating that the demand is inelastic as the value is less than 1.
The price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in its price. It is calculated using the percentage change method.
Given data:
Initial price (P₁) = Rs 10 per unit
Initial expenditure (E₁) = Rs 1500
Price increase = 20%
Calculating initial quantity:
Initial quantity (Q₁) = E₁ / P₁
Q₁ = 1500 / 10 = 150 units
Calculating new price:
New price (P₂) = P₁ + (P₁ * 20%)
P₂ = 10 + (10 * 0.20) = Rs 12
Calculating new quantity:
New quantity (Q₂) = E₁ / P₂
Q₂ = 1500 / 12 = 125 units
Calculating percentage change in quantity:
Percentage change in quantity = [(Q₂ - Q₁) / Q₁] * 100
Percentage change in quantity = [(125 - 150) / 150] * 100
Percentage change in quantity = (-25 / 150) * 100
Percentage change in quantity = -16.67%
Calculating percentage change in price:
Percentage change in price = [(P₂ - P₁) / P₁] * 100
Percentage change in price = [(12 - 10) / 10] * 100
Percentage change in price = (2 / 10) * 100
Percentage change in price = 20%
Calculating price elasticity of demand:
Price elasticity of demand = (Percentage change in quantity / Percentage change in price)
Price elasticity of demand = (-16.67% / 20%)
Price elasticity of demand = -0.833
Therefore, the price elasticity of demand for the good is -0.833, indicating that the demand is inelastic as the value is less than 1.
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Consumer spends Rs 1500 on a good priced at Rs 10 per unit. When price rises by 20 % , the consumer continues to spend Rs 1500 on that good. Calculate price elasticity of demand by % change method. Class 11 micro economic?
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Consumer spends Rs 1500 on a good priced at Rs 10 per unit. When price rises by 20 % , the consumer continues to spend Rs 1500 on that good. Calculate price elasticity of demand by % change method. Class 11 micro economic? for Class 11 2024 is part of Class 11 preparation. The Question and answers have been prepared according to the Class 11 exam syllabus. Information about Consumer spends Rs 1500 on a good priced at Rs 10 per unit. When price rises by 20 % , the consumer continues to spend Rs 1500 on that good. Calculate price elasticity of demand by % change method. Class 11 micro economic? covers all topics & solutions for Class 11 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Consumer spends Rs 1500 on a good priced at Rs 10 per unit. When price rises by 20 % , the consumer continues to spend Rs 1500 on that good. Calculate price elasticity of demand by % change method. Class 11 micro economic?.
Consumer spends Rs 1500 on a good priced at Rs 10 per unit. When price rises by 20 % , the consumer continues to spend Rs 1500 on that good. Calculate price elasticity of demand by % change method. Class 11 micro economic? for Class 11 2024 is part of Class 11 preparation. The Question and answers have been prepared according to the Class 11 exam syllabus. Information about Consumer spends Rs 1500 on a good priced at Rs 10 per unit. When price rises by 20 % , the consumer continues to spend Rs 1500 on that good. Calculate price elasticity of demand by % change method. Class 11 micro economic? covers all topics & solutions for Class 11 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Consumer spends Rs 1500 on a good priced at Rs 10 per unit. When price rises by 20 % , the consumer continues to spend Rs 1500 on that good. Calculate price elasticity of demand by % change method. Class 11 micro economic?.
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