Price Elasticity of Demand

Price elasticity of demand measures the responsiveness or sensitivity of the quantity demanded of a good or service to a change in its price. It helps determine how much the quantity demanded will change in response to a change in price.

Formula for Price Elasticity of Demand

The formula for price elasticity of demand is:

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

Calculating the Price Elasticity of Demand

To calculate the price elasticity of demand in this scenario, we need to know the percentage change in quantity demanded and the percentage change in price.

Percentage Change in Quantity Demanded = (New Quantity Demanded - Original Quantity Demanded) / Original Quantity Demanded * 100

Percentage Change in Price = (New Price - Original Price) / Original Price * 100

Using the given data:

Original Quantity Demanded = 125,000 units
New Quantity Demanded = 100,000 units
Original Price = Rs. 100 per unit
New Price = Rs. 125 per unit

Calculating the Percentage Changes

Percentage Change in Quantity Demanded = (100,000 - 125,000) / 125,000 * 100 = -20%

Percentage Change in Price = (125 - 100) / 100 * 100 = 25%

Calculating the Price Elasticity of Demand

Price Elasticity of Demand = (-20%) / (25%) = -0.8

Interpreting the Price Elasticity of Demand

The price elasticity of demand in this scenario is -0.8. Since the elasticity is negative, we can conclude that the good is inelastic. This means that the quantity demanded is not very responsive to changes in price.

Explanation

- The given scenario provides the original price of a tiffin box as Rs. 100 per unit and the quantity demanded in the market as 125,000 units.
- The company increases the price of the tiffin box to Rs. 125 per unit, resulting in a decrease in the quantity demanded to 100,000 units.
- To calculate the price elasticity of demand, we use the formula: Percentage Change in Quantity Demanded / Percentage Change in Price.
- We calculate the percentage change in quantity demanded by subtracting the new quantity demanded from the original quantity demanded, dividing it by the original quantity demanded, and then multiplying by 100.
- Similarly, we calculate the percentage change in price by subtracting the new price from the original price, dividing it by the original price, and then multiplying by 100.
- Using the calculated percentage changes, we calculate the price elasticity of demand by dividing the percentage change in quantity demanded by the percentage change in price.
- The resulting price elasticity of demand is -0.8, indicating that the tiffin box is inelastic. This means that the quantity demanded is not very responsive to changes in price.
- In simple terms, a 1% increase in price leads to a 0.8% decrease in quantity demanded.