a. How do you calculate a commodity's price elasticity of demand? b. If a commodity's elasticity...

a. How do you calculate a commodity's price elasticity of demand?

b. If a commodity's elasticity is -1.25, is its price elasticity elastic or inelastic? Explain. What does that imply about the relative changes in price and quantity?

Expert Solution

1) Price elasticity of demand is the measure of the percentage change in the quantity demanded in response to some percentage change in corresponding prices of that particular commodity. Law of demand states the negative relationship between price and quantity , other things remain the same .

Accordingly, this inverse relationship between the price and demand is expressed by negative(-) sign in the formula of elasticity of demand as

Price elasticity of demand (Ed) = (-) ℅ Change in Quantity demand/ ℅ Change in Price

2) Now if the commodity's elasticity is -1.25 . When the percentage change in the quantity demanded of a commodity is greater than the percentage change in price, it is termed as elastic demand. Same in our case , elasticity is greater than 1 , so it is said to be elastic demand .

This means that , Percentage change in Quantity > Percentage change in Price .

So this means that when a percentage change in price happens , then percentage change in Quantity is more than as compared to percentage change in price .

Rahul Sunny answered 2 years ago

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