Demand for a good is unitary elastic. The quantity demanded of the good at price Rs 10 is 80 units. How much quantity will be demanded when the price rises by 20%?
Answers
Both the demand and supply curve show the relationship between price and the number of units demanded or supplied. Price elasticity is the ratio between the percentage change in the quantity demanded (Qd) or supplied (Qs) and the corresponding percent change in price. The price elasticity of demand is the percentage change in the quantity demanded of a good or service divided by the percentage change in the price. The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price.
When Demand for a good is unitary elastic. The quantity demanded of the good at price Rs 10 is 80 units. Therefore, 64 units will be demanded when the price rises by 20%.
Since it's a unitary elastic demand ∴ it implies that quantity demanded will change in proportion to the rise in price.
% increase in price =20%
⇒ change in price = 10*20/100 = 2
⇒new price = 2+10 = 12
Being unitary elastic demand if there is 20% increase in price there will be 20% decrease in the quantity demanded ∵ price and quantity have inverse relationship.
∴change in demand = 20*80/100 = 16 units
new demand = 80 - 16 = 64 units