Question

Comment upon the degree of elasticity of demand for Good X, in the following given situations, if the price of the commodity rises from Rs. 5 per unit to Rs. 7 per unit and the quantity demanded falls from 20 units to 16 units :

i) Using the total household expenditure method,

ii) Using proportionate method.

Answer 1

$\left(i\right)P\times Q=TE5\times 20=1007\times 16=112$

Since the price & total expenditure carry positive relation Ed<1, relatively inelastic demand.

$\left(ii\right)Ed=\frac{\text{change in Quantitiy Demanded}}{\text{Change in Price}}\times \frac{\text{Original Price}}{\text{Original Quantity(Absolute values taken)}}=\left(4/2\right)\times \left(5/20\right)=0.5\left(\text{Ed<1,relatively inelastic demand.}\right)$