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 ot 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

(i)
$$\begin{array}{ccccc}\text{P}& \times & \text{Q}& =& \text{TE}\\ 6& \times & 20& =& 100\\ 7& \times & 16& =& 112\end{array}$$

Since the price & total expenditure carry positive relation Ed<1, relatively inelastic demand.
(ii)$\text{Ed}=\frac{\text{Change in Quantity Demanded}}{\text{Change in Price}}\text{X}\frac{\text{Original Price}}{\text{Original Quantity}}$
(Absolute values taken)
$=\left(\frac{4}{2}\right)\times \left(\frac{5}{20}\right)=0.5(Ed<1,\text{relatively inelastic demand})$