Principles of Economics

Principles of Economics

QUESTION:

Suppose the price elasticity of demand for text books is two and the price of the text book is increased by 10%. By how much does the quantity demand fall? Inter the result and discuss reasons for the fall in the quantity demand.

SOLUTION:

Price elasticity of demand (PED) is defined as the responsiveness of the quantity demanded of a good or service to a change in its price.

Price Elasticity of Demand

Percentage Change in Quantity Demand for product A

Percentage Change in Price for Product A

So,

Percentage Change in Quantity Demand for Product A

= PED X Percentage Change in Price for Product A

Given, PED of Books= 2,

Percentage Change in Price for Books = 10%

So,

Percentage Change in Demand for Books

= 2 X 10%

= 20%

Therefore the fall in the Quantity Demand of the Books will be 20%

Price elasticity of demand

In other words, it is percentage change in quantity demanded by the percentage change in price of the same commodity. In economics and business studies, the price elasticity of demand is a measure of the sensitivity of quantity demanded to changes in price. It is measured as elasticity, that is, it measures the relationship as the ratio of percentage changes between quantity demanded of a good and changes in its price.

In simpler words, demand for a product can be said to be very inelastic if consumers will pay almost any price for the product, and very elastic if consumers will only pay a certain price, or a narrow range of prices, for the product. Inelastic demand means a producer can raise prices without much hurting demand for its product, and elastic demand means that consumers are sensitive to the price at which a product is sold and will not buy it if the price rises by what they consider too much.

Drinking water is a good example of a good that has inelastic characteristics in that people will pay anything for it (high or low prices with relatively equivalent...