Question

Alpha Ltd market share was declining due to high competition in the market so it decided to enter a new segment. It wanted to determine the relationship between change in the quantity demanded of the product due to change in the price of the product in the market. Assume that at the price of ₹100, the demand for the product is 400 units. If the price of the product increases to ₹120, the demand decreases to 250 units. Calculate the price elasticity:

Answer 1

Answer: The price elasticity of demand is -1.875.

The price elasticity of demand (PED) is calculated with the formula:

$PED = \frac{\frac{\Delta Q}{Q}}{\frac{\Delta P}{P}}$

This can be rewritten as :

$\mathbf{PED = \frac{\Delta Q}{Q} * {\frac{P}{\Delta P}}}$

where

ΔQ refers to the change in Quantity demanded. Mathematically this expressed as Q₂ - Q₁.

Q refers to the original quantity demanded

ΔP refers to the change in the price of the commodity. Mathematically this expressed as P₂ - P₁.

Substituting the values in the equation above we get,

$PED = \frac{(250-400)}{400} * {\frac{100}{(120-100)}}$

$PED = \frac{(-150)}{400} * {\frac{100}{(20)}}$

Simplifying we get,

$PED = \frac{(-15)}{8}}}$

$\mathbf{PED = -1.875}$