Price Elasticity of Demand Calculation

To calculate the price elasticity of demand, we need to use the following formula:

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

Given that the demand increased by 10 units when the price decreased by 2, we can calculate the percentage change in quantity demanded and price as follows:

Percentage Change in Quantity Demanded = (10 / 90) x 100% = 11.11%

Percentage Change in Price = (2 / 10) x 100% = 20%

Using these values, we can calculate the price elasticity of demand as follows:

Price Elasticity of Demand = (11.11% / 20%) = 0.555

Therefore, the price elasticity of demand for this product is 0.555.

Explanation of Price Elasticity of Demand

Price elasticity of demand measures the responsiveness of quantity demanded to changes in price. In this case, the price elasticity of demand is 0.555, which means that for a 1% decrease in price, the quantity demanded will increase by 0.555%. This indicates that the product has a relatively elastic demand, which means that consumers are relatively sensitive to changes in price.

When the price of the product decreased by 2, the demand increased by 10 units, which shows that consumers are responsive to price changes. As a result, the demand increased to 100 units, and the price decreased to 8. This indicates that the product is price sensitive, and a decrease in price can lead to an increase in demand.

Overall, the price elasticity of demand is an essential concept in economics as it helps businesses determine the optimal price for their products and understand how changes in price can impact consumer demand.