New Problems Based on Price elasticity of Demand

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Questions for Practice:

1. Suppose the price of a commodity falls from ₹6 to ₹4 per unit and due to this quantity demanded of the commodity increases from 80 units to 120 units. Find out the price elasticity of demand

Solution:

Following information is given:

 

Q = 80 units

 

Q1= 120 units

 Î”Q =Q1-Q

      =120-80

      = 40

 

P = ₹6

 

P1= ₹4

ΔP = P1-P

     = 4-6

     = -2

       

                                     Ed=?

 










Note:  (-) negative sign is prefixed to the formula because price and demand are inversely related. Doing this would bring the value of elasticity of demand to positive.

Interpretation:

The calculated value of Elasticity of demand(Ed) is 1.5>1 indicates elastic demand or more than unitary elastic demand. It implies that 10% fall in price of the commodity caused 15% increase in its demand showing that change in demand is greater than change in price of the commodity.

2.  A consumer purchases 80 units of a commodity when its price is ₹ 1 per unit and he purchases 48 units when its price rises to₹ 2 per unit. What is the price elasticity of demand for the commodity?

Solution:

Following information is given:

 

Q = 80 units

 

Q1= 48 units

 Î”Q =Q1-Q

      = 48-80

      = -32

 

P = ₹ 1

 

P1= ₹2

ΔP = P1-P

     = 2-1

     = 1

       

                                     Ed=?

 








Note:  (-) negative sign is prefixed to the formula because price and demand are inversely related. Doing this would bring the value of elasticity of demand to be positive.


Interpretation:

The above calculated value of Elasticity of demand(Ed) is 0.4 < 1 indicates inelastic demand or less than unitary elastic demand. It implies that 10% rise in price of the commodity caused 4 % fall in its demand showing that change in demand is less than change in price.


3. Suppose that the price elasticity of demand for petrol is equal to unity and at ₹15 per litre an individual consumes (i.e. demands) 80 litres of petrol in a weak. How much price of petrol should be fixed so that he demands 60 litres of petrol.

Solution:

Following information is given:

 

Q = 80 lts.

 

Q1= 60 lts.

 Î”Q =Q1-Q

      =60-80

      = -20

 

P = ₹ 15

 

P1=?

ΔP = P1-P

 Î”P  = P1-15…….(1)

    

       

                                     Ed=1
















Note:  (-) negative sign will not be prefixed to the formula as the given value of elasticity is positive.

Interpretation:

In order to get unitary elasticity, new price should be ₹11.25


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