Price Elasticity of Demand

Price elasticity of demand is the measure of the responsiveness of the quantity demanded of a good or service to a change in its price. It helps in understanding how consumers react to changes in price and how it affects the total revenue of the firm.

Calculation of Price Elasticity of Demand

The formula to calculate price elasticity of demand is:

Price Elasticity of Demand = Percentage Change in Quantity Demanded / Percentage Change in Price

Given Information

Initial Price (P1) = Rs. 4
New Price (P2) = Rs. 6
Initial Quantity Demanded (Q1) = 15 units
New Quantity Demanded (Q2) = 10 units

Calculation of Percentage Change in Quantity Demanded

Percentage Change in Quantity Demanded = (New Quantity Demanded - Initial Quantity Demanded) / Initial Quantity Demanded x 100

Percentage Change in Quantity Demanded = (10 - 15) / 15 x 100 = -33.33%

Calculation of Percentage Change in Price

Percentage Change in Price = (New Price - Initial Price) / Initial Price x 100

Percentage Change in Price = (6 - 4) / 4 x 100 = 50%

Calculation of Price Elasticity of Demand

Price Elasticity of Demand = Percentage Change in Quantity Demanded / Percentage Change in Price

Price Elasticity of Demand = -33.33% / 50% = -0.67

Interpretation of Price Elasticity of Demand

The price elasticity of demand is a negative value. It means that the demand for the commodity is elastic. The value of -0.67 indicates that a 1% increase in price will result in a 0.67% decrease in quantity demanded. The demand for the commodity is sensitive to changes in price.

Conclusion

Price elasticity of demand is an important concept in economics. It helps firms in understanding how consumers react to changes in price and how it affects total revenue. In this case, the price elasticity of demand for the commodity is -0.67, indicating that the demand is elastic.

0.67