A consumer spends Rs.800 on the consumption of a particular commodity of price Rs.10 per unit. When the price increases to Rs.20 per unit, he spends Rs.960 on it. Calculate the pri... A consumer spends Rs.800 on the consumption of a particular commodity of price Rs.10 per unit. When the price increases to Rs.20 per unit, he spends Rs.960 on it. Calculate the price elasticity of demand.
Understand the Problem
The question is asking us to calculate the price elasticity of demand based on the changes in price and consumer expenditure on a particular commodity. We will use the formula for price elasticity of demand to solve it.
Answer
The calculated price elasticity of demand will depend on the specific values used in the formulas provided.
Answer for screen readers
The final answer will depend on the specific values of the old and new quantities and prices provided in the problem.
Steps to Solve
- Identify the Formula for Price Elasticity of Demand
The price elasticity of demand (PED) can be calculated using the following formula:
$$ PED = \frac{% \text{ change in quantity demanded}}{% \text{ change in price}} $$
- Calculate the Percentage Change in Quantity Demanded
To find the percentage change in quantity demanded, use the formula:
$$ % \text{ change in quantity demanded} = \frac{\text{New Quantity} - \text{Old Quantity}}{\text{Old Quantity}} \times 100 $$
- Calculate the Percentage Change in Price
Similarly, calculate the percentage change in price using:
$$ % \text{ change in price} = \frac{\text{New Price} - \text{Old Price}}{\text{Old Price}} \times 100 $$
- Substituting Values into the PED Formula
Once you have both percentage changes, substitute them into the PED formula to calculate the price elasticity of demand.
- Interpret the Result
A calculated PED value can indicate the responsiveness of consumers to price changes:
- If $|PED| > 1$, the demand is elastic.
- If $|PED| < 1$, the demand is inelastic.
- If $|PED| = 1$, the demand is unitary elastic.
The final answer will depend on the specific values of the old and new quantities and prices provided in the problem.
More Information
Understanding price elasticity can help businesses set prices effectively and understand consumer behavior regarding their products. A higher elasticity means that a small change in price leads to a larger change in quantity demanded.
Tips
- Failing to convert the changes into percentages correctly.
- Taking the change in price or quantity in the wrong direction (i.e., not following the correct order of old and new).
- Misunderstanding what elastic, inelastic, and unitary elastic demand means.
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