Chapter 6, Problem 1QE

Determine the price elasticity of demand if, in response to an increase in price of 10 percent, quantity demanded decreases by 20 percent. Is demand elastic or inelastic? (LO6-1)

To determine

Determine whether the demand is elastic or inelastic.

Explanation of Solution

The price elasticity of demand can be calculated using the following formula:

${\text{E}}_{\text{D}}=\frac{\text{Percentage change in quntity demanded}}{\text{Percentage change in price}}$        (1)

Since the change in price is 10% and the change in quantity supplied is 20%, the price elasticity of demand can be calculated using Equation 1 as follows:

$\begin{array}{c}{\text{E}}_{\text{S}}=\frac{\text{20\%}}{\text{10\%}}\\ =2\%\end{array}$

Thus, the price elasticity of demand is 2%.

The percentage change in quantity demand is higher than the percentage change in price, that is, the price elasticity is greater than one and then by definition, demand is elastic.

Economics Concept Introduction

Price elasticity of demand: Change in the quantity demanded of a product due to a change in its price is known as the price elasticity of demand.