Question

Determine the price elasticity of demand for commodity X, if a 15% increase in its price:
a) has no impact on its total expenditure.
b) reduces total expenditure.
c) increases total expenditure.

Explain in detail.

Answer 1

Ans) Price elasticity of demand is the responsiveness of quantity demanded to change in price.

Elasticity = %change in quantity demanded ÷ %change in price.

1) Elastic demand ÷ when elasticity is more than 1, good is elastic in nature. That is, with change in price, there is significant change in quantity demanded.

2) Unit elastic ÷ when elasticity is 1, good is unit elastic in nature. That is, quantity demanded and price change with same proportion.

3) Inelastic ÷ when elasticity is less than 1, good is inelastic in nature. That is, with change in price, there is no significant change in quantity demanded.

Now,

A) When there is no impact in total expenditure, then it means that the demand is unit elastic. As people have changed their demand in proportion to the price.

Elasticity = 1

B) When total expenditure is reduced then it means demand is elastic. It is because people have reduced their demand more than the increase in price. That is more people have shifted to cheaper alternative.

Elasticity > 1

C) When total expenditure increases then it means demand is inelastic. Because people cannot change their demand and hence will end up with higher expenditure.

Elasticity <1