Price elasticity of demand is measured by the ratio of
percentage change in quantity demanded to percentage change in price of the
commodity.
As explained below :
Mathematically speaking, price elasticity of
demand is a negative number because of the negative slope of the demand curve,
the price and the quantity change in the opposite directions from each other.
One change will be positive and the other negative.
As explained below :
 |
| price elasticity |
One change will be positive and the other negative.
Hence, the elasticity of demand
will always result in negative value.
So
while calculating price elasticity of demand by percentage method,common
practice is to ignore the negative signs,
i.e. we should take only the absolute values and not their signs.
i.e. we should take only the absolute values and not their signs.
However,
some prefer to put a negative sign in front of the formula, in view of the
negative slope of the demand curve.
Let
us understand the above concept by taking a numerical example:
When the price of the good is Rs. 5, the consumer buys 20 units of that good.
When the price of the good is Rs. 5, the consumer buys 20 units of that good.
When
the price changes to Rs. 7, the quantity purchased changes to 12 units.
Calculate the price elasticity of demand.
 |
| unitary elasticity |
ep is 1, which shows unitary
elasticity.
Solved Numericals:
Numerical
1 :
Price
of the commodity X falls from Rs.5 per kg to Rs.4 per kg and the quantity
demanded rises from 4 kg to 6 kg. Calculate price elasticity of demand and its
nature.
We see that ep is 2.5, and the nature of elasticity is more than
unity or elastic demand.
Numerical 2:
Numerical 2:
A consumer buys 50 units of a good at Rs.4 per unit.
When its price falls by 25 % its demand rises to 100 units. Find out the price
elasticity of demand.
We see that ep is 4.
Numerical
3:
As a result of 10 % fall in price of a good, its
demand rises from 100 units to 120 units. Find out the price elasticity of
demand.
We see that ep is 2.
Numerical
4:
If the initial demand was 100 units. With the rise
in price by Rs.5, the quantity demanded decreases by 5 units. Elasticity of
demand is 1.2. Find out the price before
the change in demand.
Price before change in demand is Rs. 120.
Numerical
5:
The consumer buys 160 units of a good at a price of Rs.8
per unit. Price falls to Rs.6 per unit.
How much quantity will the consumer buys at the new price if price elasticity of demand is (-)2 .
How much quantity will the consumer buys at the new price if price elasticity of demand is (-)2 .
As in the above numerical, elasticity of demand has
been specified with a negative sign.
Accordingly, we need not use ‘-’ sign as the prefix to the formula of measuring elasticity of demand. Thus,
Accordingly, we need not use ‘-’ sign as the prefix to the formula of measuring elasticity of demand. Thus,
The consumer will buy 240 units at the new price.
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