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Question

A consumer spends Rs.1,000 on a good priced at Rs.10 per unit. When its price falls by 20 per cent, the consumer spends Rs.800 on the good. Calculate the price elasticity of demand by the percentage method.

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Solution

Initial price (P)=Rs.10
Fall in price by 20 per cent =10×20100=Rs.2
New price (P1)=Rs.10Rs.2=Rs.8
Price (Rs.)Expenditure (Rs.)Quantity Demanded (Units)
101,0001,00010=100
88008008=100
Percentage change in quantity demanded =QQ×100=100100100×100=0100×100=0
Price elasticity of demand (Ed)=()Percentage change in quantity demandedPercentage change in price
=()020%
=0
Price elasticity of demand =0 (zero).

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