Question

If a fall in price from £30 to £24 results in an increase in demand from 800 to 1000 units. Please

Answer 1

Answer: The coefficient of elasticity is 1.25 and

Demand is elastic.

Explanation: The first thing to note is the calculation of price elasticity of demand which is given as "Percentage change in quantity demanded of a commodity, divided by, percentage change in price of the commodity."

This is expressed as;

{% ∆ in quantity demanded}/{% ∆ in price}.

Where % = percentage

∆ = change

We shall start with the numerator which is % ∆ in quantity demanded.

Given that the quantity demanded rose from 800 units to 1000 units the difference between both quantity demanded levels is 200 units. Remember to always use the initial quantity demanded as a basis for your calculation. From this we now have the percentage change in quantity demanded as

200/800 × 100 (multiplying by 100 expresses your answer as a percentage)

= ¼ × 100

= 25%

Next we move on to the denominator which is % ∆ in price

Given that the price fell from £30 to £24

The difference between both price levels is £6. Using the initial price as the basis of our calculation, the percentage change in price becomes

6/30 × 100 (as a percentage)

= 1/5 × 100

= 20%

Going back to the formular for calculating price elasticity of demand which is

{% ∆ in quantity demanded}/ {% ∆ in price}

= 25%/20%

= 5/4

= 1 ¼ or 1.25 (as a decimal)

The value of elasticity is 1.25

If elasticity is greater than 1 (that is, E>1), then demand is elastic

NOTE: Additional information, if E<1 then demand is inelastic. If however E=1, then you have unitary elasticity of demand.