Question

A 20 per cent fall in the price of a good raises its demand from 600 units to 750 units. Calculate its price elasticity of demand.

Answer 1

Given, percentage change in price $=(-)20\%$

Q = 600 units, $Q_1=750\text{units}$;

$\Delta Q=Q_1-Q=(750-600)\text{units}=150\text{units}$

Percentage change in quantity demanded

$=\frac{\Delta Q}{Q}\times 100=\frac{150}{600}\times 100=25\%$

Price elasticity of demand

$\left(E_d\right)=\frac{\text{Percentage change in quantity demanded}}{\text{Percentage change in price}}$

$=\frac{25\%}{(-)20\%}=-1.25$

Price elasticity of demand = - 1.25.