If the price of a good increases from ₹20 to ₹25 and the quantity demanded decreases from 100 units to 80 units, calculate the price elasticity of demand.
If the price of a good increases from ₹20 to ₹25 and the quantity demanded decreases from 100 units to 80 units, calculate the price elasticity of demand.
Solution
Option 1 -> PED = 1.0 would indicate unit elastic demand, but the calculation yields a different result.
Option 2 -> PED = 1.8 would indicate elastic demand where quantity changes proportionately more than price, which doesn't match our calculation.
Option 3 -> PED = 0.8 indicates inelastic demand where quantity changes proportionately less than price.
Option 4 -> PED = 1.25 would indicate elastic demand, but doesn't match the calculated value.
Hence, Option 3: 0.8 -> Using the formula: PED = [(Q2-Q1)/Q1] / [(P2-P1)/P1] = [(80-100)/100] / [(25-20)/20] = [-20/100] / [5/20] = -0.2 / 0.25 = -0.8. Taking the absolute value, we get 0.8. This indicates inelastic demand, meaning a 1% increase in price leads to less than 1% decrease in quantity demanded (specifically 0.8%). -> correct
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