Price Elasticity of Demand

Price elasticity of demand measures the responsiveness of quantity demanded to a change in the price of a commodity. It helps to determine the degree to which the demand for a good or service varies with its price.

Formula for Price Elasticity of Demand

The formula for price elasticity of demand is:

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

Calculation of Price Elasticity of Demand

Using the given figures, we can calculate the price elasticity of demand as follows:

% Change in Quantity Demanded = ((New Quantity Demanded - Old Quantity Demanded) / Old Quantity Demanded) x 100
= ((200 - 300) / 300) x 100
= -33.33%

% Change in Price = ((New Price - Old Price) / Old Price) x 100
= ((200 - 120) / 120) x 100
= 66.67%

Price Elasticity of Demand = (-33.33% / 66.67%)
= -0.5

Therefore, the price elasticity of demand for the commodity is -0.5.

Interpretation of Price Elasticity of Demand

The negative sign of price elasticity of demand indicates that the commodity is price elastic, i.e. a change in price of the commodity leads to a proportionately larger change in quantity demanded. In this case, the price elasticity of demand is -0.5, which means that a 1% increase in price will result in a 0.5% decrease in quantity demanded.

Overall, the price elasticity of demand for a commodity determines the degree to which consumers adjust their demand for the commodity in response to a change in its price. A high price elasticity of demand implies that consumers are very sensitive to changes in price, while a low price elasticity of demand indicates that consumers are less responsive to price changes.