question_answer

(i) Explain the concept of price elasticity of demand.

(ii) When price of a good falls by 10%, its quantity demanded rises from 40 to 50 units

 

Answer:

(i) Price elasticity of demand measures the responsiveness in quantity demanded when price of the commodity changes. It can be computed in the following manner: \[\text{Price}\,\text{Elasticity}\,\text{of}\,\text{Demand(}{{\text{E}}_{\text{d}}}\text{)=}\frac{\text{Percentage}\,\text{Change}\,\text{in}\,\text{Quantity}\,\text{Demanded}}{\text{Percentage}\,\text{Change}\,\text{in}\,\text{Price}}\] (ii) Fall in price of good = 10% Original quantity demanded (Q) = 40 units Change in quantity demanded\[(\Delta Q)=50-40=10\,\,units\] Percentage change in quantity demanded =\[\frac{\Delta Q}{Q}\times 100\]                                                             \[=\frac{10}{40}\times 100=25%\] \[\text{Elasticity}\,\text{of}\,\text{Demand=}\frac{\text{Percentage}\,\text{Change}\,\text{in}\,\text{Quantity}\,\text{Demand}}{\text{Percentage}\,\text{Change}\,\text{in}\,\text{Price}}\]                         \[=(-)\frac{25}{10}=(-)2.5\]