Solved Questions: Percentage Method of Price Elasticity of Demand

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Measuring Price Elasticity of Demand- Proportionate or Percentage Method

 Learning Contents:                                                            

·         Questions For Practice - Percentage method of price elasticity of demand

 

Proportionate or Percentage Method

It is one of the commonly used method for measuring the price elasticity of demand. In this method, the elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. The formula for calculating the elasticity of demand is given below:






1.      The elasticity of oil demand has been estimated at -0.5. If the price of oil rises by 10%, how much will the quantity of oil demanded fall? 

 Solution:  The following information is given:

 

   Percentage change in the price of oil = 10%

 

   Percentage change in the demand for oil =?

       

                                     Ed=-0.5












Interpretation:

The above calculation implies that quantity demand will fall by 5% if the price for the commodity rise by 10% showing demand is inelastic.

Note: Whenever the value of  Ed is given negative, then it is not advisable to put a negative sign in the formula.

2. Suppose that a 10 percent hike in the price of a textbook decreases the quantity demanded by 2 percent. The price elasticity of demand for textbooks is

Solution:  The following information is given:

 

   Percentage change in the price of textbook = 10%

 

   Percentage change in the demand of textbook =2%

       

                                     Ed=?




Interpretation:

The above calculated value of Elasticity of demand(Ed) is 0.2 < 1 indicates less than unitary elastic demand. It implies that a 10% rise in the price of the commodity caused only a 2 % fall in demand showing that change in demand is less than change in price. 


3. Price elasticity of demand is found to be (-2). Price falls from ₹ 10 per unit to 8 per unit. Find the percentage increase in quantity demanded.

Solution:  The Following information is given:

 

P = ₹ 10

 

P1= ₹ 8

ΔP = P1-P

     =8-10

     = -2

% change in price = ×100

= -2/10×100

= -20%

 

          Percentage change in the demand =?

       

                        Ed= -2

 










Interpretation:

The above calculation shows that quantity demand will increase by 40% if the price for the commodity falls by 20% showing the demand is elastic.

Note: Whenever the value of  Ed is given negative, then it is not advisable to put a negative sign in the formula.

4. The price elasticity of demand of a good is (-1). Calculate the percentage change in price that will raise the demand from 20 units to 30 units.

Solution:  The Following information is given:

 

Q = 20

 

Q1= 30

ΔQ = Q1-Q

     =30-20

     = 10

% Change in Q.D = ×100

= 10/20×100

= 50%

 

          Percentage change in price =?

       

                        Ed= -1

 









Interpretation:

The above calculation shows that quantity demand increases by 50% when the price for the commodity falls by 50% showing the demand is unitary elastic.

Note: Whenever the value of  Ed is given negative, then it is not advisable to put a negative sign in the formula.

5. For a commodity,  = -0.2, and elasticity of demand = -0.6. Find percentage change in quantity demanded.


Solution:  The following information is given:

Percentage change in price = ×100

= -0.2 ×100

= -20%

 

          Percentage change in quantity demanded =?

       

                        Ed= - 0.6











Interpretation:

The above calculation shows that quantity demand increases by 12% when price for the commodity falls by 20% showing the demand is inelastic.

Note: Whenever the value of  Ed is given negative, then it is not advisable to put a negative sign in the formula.

6. A 5% fall in price of good raises its demand from 300 units to 318 units. Calculate its price elasticity of demand.

Solution:  The Following information is given:

 

Q = 300

 

Q1= 318

ΔQ =Q1-Q   =318-300

     = 18

% Change in Q.D

 = ×100

= 18/300×100

= 6%

 

          Percentage change in price = -5%

       

                        Ed=?










Interpretation:

The above calculation shows that quantity demand increases by 6% when price for the commodity falls by 5% showing the demand is elastic.



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