Question

Suppose the price of flour increases from $0.80 to $1.00 a pound and the quantity demanded decreases from 100 pounds to 95 pounds. What is the price elasticity of demand for flour? Is the demand for flour elastic or inelastic?

Answer 1

The price elasticity of demand for flour is -0.2 and the demand for flour is inelastic.

Explanation:

In Economics,the price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in the product price.Here the price of flour increases from $0.8 to $1.00 and the quantity demanded of flour decreases from 100 pounds to 95 pounds.

Therefore,percentage change in price=$(1-0.8)\div 0.8=0.25$

Percentage change in quantity demanded of flour=$(95-100)\div 100=-0.05$

Hence,the price elasticity of demand of flour=$\frac{-0.05}{0.25}$=-0.2

Therefore,the price elasticity of demand of flour in this case is -0.2 and hence,the demand for flour is inelastic as the absolute value of the price elasticity of demand lies in between 0 and 1 in this case.