When price of radio is Rs. 500 then quantity demanded is 100 and when ...
Calculation of Price Elasticity of Demand
- Price of radio (P1) = Rs. 500
- Quantity demanded (Q1) = 100
- Price of radio (P2) = Rs. 400
- Quantity demanded (Q2) = 150
Formula for Price Elasticity of Demand
Price Elasticity of Demand (PED) = % Change in Quantity Demanded / % Change in Price
Calculating the Percentage Change in Quantity Demanded
Percentage Change in Quantity Demanded = ((Q2 - Q1) / ((Q1 + Q2) / 2)) x 100
- Percentage Change in Quantity Demanded = ((150 - 100) / ((100 + 150) / 2)) x 100
- Percentage Change in Quantity Demanded = (50 / 125) x 100
- Percentage Change in Quantity Demanded = 40%
Calculating the Percentage Change in Price
Percentage Change in Price = ((P2 - P1) / ((P1 + P2) / 2)) x 100
- Percentage Change in Price = ((400 - 500) / ((500 + 400) / 2)) x 100
- Percentage Change in Price = (-100 / 450) x 100
- Percentage Change in Price = -22.22%
Calculating the Price Elasticity of Demand
Price Elasticity of Demand (PED) = % Change in Quantity Demanded / % Change in Price
- Price Elasticity of Demand (PED) = 40% / -22.22%
- Price Elasticity of Demand (PED) = -1.8
Interpreting the Value of Price Elasticity of Demand
The value of Price Elasticity of Demand is greater than 1, so the demand for radios is elastic. This means that a small change in price will cause a relatively larger change in the quantity demanded. Therefore, if the price of radios is decreased, the quantity demanded will increase significantly.