There is a 50% fall in price of the commodity but quantity demanded re...
Elasticity of Demand
Definition
Elasticity of demand is a measure of how responsive the quantity demanded of a good or service is to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.
Formula
Elasticity of demand = percentage change in quantity demanded / percentage change in price
Given Data
Price of commodity = P1
Quantity demanded = Q1
New price of commodity = P2 = P1 / 2 (50% fall in price)
Quantity demanded = Q2 = Q1
Calculation
Percentage change in price = (P2 - P1) / P1 * 100%
Percentage change in price = (P1/2 - P1) / P1 * 100%
Percentage change in price = -50%
Percentage change in quantity demanded = (Q2 - Q1) / Q1 * 100%
Percentage change in quantity demanded = (Q1 - Q1) / Q1 * 100%
Percentage change in quantity demanded = 0%
Elasticity of demand = percentage change in quantity demanded / percentage change in price
Elasticity of demand = 0% / -50% = 0
Explanation
The elasticity of demand in this scenario is zero. This means that the quantity demanded of the commodity is completely unresponsive to changes in price. A 50% fall in price has no effect on the quantity demanded, which remains constant at 150 units. This could be due to a number of factors, such as the commodity being a necessity with no close substitutes, or the consumers being insensitive to price changes. This information could be useful for firms in determining their pricing strategy and understanding the behavior of their target market.