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Hen price of a good is Rs.13 per unit, the consumers buys 11 units of that good. When price rises to Rs.15 per unit, the consumer continues to buy 11 units. Calculate price elasticity of demand.(3?
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Calculation of Price Elasticity of Demand
Price elasticity of demand is a measure of the responsiveness of the quantity demanded of a good to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.
Step 1: Calculate the percentage change in price
The percentage change in price is calculated as follows:
Percentage change in price = ((New price - Old price) / Old price) x 100
Using the given data, the percentage change in price is:
Percentage change in price = ((15 - 13) / 13) x 100 = 15.38%
Step 2: Calculate the percentage change in quantity demanded
The percentage change in quantity demanded is calculated as follows:
Percentage change in quantity demanded = ((New quantity demanded - Old quantity demanded) / Old quantity demanded) x 100
Using the given data, the percentage change in quantity demanded is:
Percentage change in quantity demanded = ((11 - 11) / 11) x 100 = 0%
Step 3: Calculate the price elasticity of demand
The price elasticity of demand is calculated as follows:
Price elasticity of demand = (Percentage change in quantity demanded / Percentage change in price)
Using the calculated values from Steps 1 and 2, the price elasticity of demand is:
Price elasticity of demand = (0% / 15.38%) = 0
Explanation
The price elasticity of demand measures the responsiveness of quantity demanded to a change in price. A price elasticity of demand of 0 means that the quantity demanded does not change in response to a change in price. This is known as perfectly inelastic demand.
In this case, the consumer continues to buy 11 units of the good even when the price increases from Rs.13 to Rs.15 per unit. This indicates that the consumer has a strong preference for the good and is willing to pay the higher price to maintain their consumption level. As a result, the price elasticity of demand is 0, indicating that demand is perfectly inelastic.
It is important for producers and sellers to understand the price elasticity of demand for their goods in order to make informed decisions about pricing strategies and revenue optimization. When demand is perfectly inelastic, increasing the price will not lead to a decrease in revenue, as the quantity demanded remains constant. However, if demand is elastic, increasing the price will lead to a decrease in revenue, as the quantity demanded will decrease by a greater proportion than the increase in price.
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Hen price of a good is Rs.13 per unit, the consumers buys 11 units of that good. When price rises to Rs.15 per unit, the consumer continues to buy 11 units. Calculate price elasticity of demand.(3?
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