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Published on: 03/09/2019
Elasticity of Demand
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1.
Suppose the price elasticity of demand for a good is -0.2. If there is a 5% increase in the price of the good, by what percentage will the demand for the good go down?
2.
Consider the demand curve D(P) = 10 - 3p. What is the elasticity at price 5/3?
3.
Consider the demand for a good. At price Rs 4, the demand for the good is 25 units. Suppose price of the good increases to Rs 5, and as a result, the demand for the good falls to 20 units. Calculate the price elasticity?
4.
Explain price elasticity of demand.
5.
Suppose, there was 4% decrease in the price of a good and as a result, the expenditure on the goods increased by 2%. What can you say about the elasticity of demand?
6.
Suppose the price elasticity of demand for a good is -0.2. How will the expenditure on the good be affected if there is a 10% increase in the price of the good?
1.
| %Change in Demand =? | % Change in Price = 5% |
| Elasticity of Demand (ED) = (-) 0.2 | |
Price Elasticity of Demand (ED) = \({\% \ change \ in \ quntity \ Demand \over \% \ Change \ in \ price}\)
\((-)0.2={\% \ change \ in \ quntity \ Demand \over \% 5}\)
Percentage fall in demand = 1%
Demand for the piece of goods will fall by 1%.
2.
Given Q = 10 - 3P.
When P = \({5\over3},Q=10-3\times{5\over3}=5\)
Differentiating Q with respect to P,
we get,
We know,\({\triangle Q\over \triangle P}=-3\)
\(ED={\triangle Q\over \triangle P}\times {P\over Q}=-3\times{5/3\over 5}\)
\(=-3\times{5\over3}\times{1\over5}=[-]1\)
Negative Sign of ED indicates that inverse relationship between price and quantity demanded.
PED = 1 [Unitary elastic demand].
3.
| Original Quantity (Q) = 25 units | Original Price (P) = Rs 4 |
| Fall in Quantity (\(\triangle\)Q) = - 5 units | Rise in Price (DP) = Rs 1 |
| New Quantity (Q1) = 20 units | New Price (P1)=Rs 5 |
| Elasticity of Demand (ED) =? | |
Price Elasticity of demand (ED) \(={\triangle Q\over \triangle P }\times {P\over Q}={-5\over 1}\times {4\over25}=(-)0.8\)
ED = (-) 0.8 (Demand is less elastic as ED < 1)
Negative sign indicates the inverse relationship between price and quantity demanded.
4.
The degree of responsiveness of quantity demanded to changes in price of commodity is known as price elasticity of demand.
5.
( )
As total expenditure has increased with the decrease in price, the demand is said to be highly elastic.
6.
( )
Total expenditure will rise if there is 10% rise in the price of the good since its demand is inelastic (Given ED = 0.2).
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