Question

Business firms sell a good at the price of Rs 450. The firm has decided to reduce the price of a good to Rs 350. Consequently, the quantity demanded the goods rose from 25,000 units to 35,000 units. Calculate the price elasticity of demand

The answer should be a min of 500 Words. And pls send me in computerized word format

Answer 1

Since the law of demand stats that there is an opposite relationship between price and quantity demanded and other factors which affect the demand remains same. A numerical tabulation of this relationship is known as the demand schedule. The demand curve is the graphical representation of the law of demand. The demand curve is negatively sloped. The demand curve shows an inverse relationship between price and quantity demand.

The demand determinant are; Its own price, price of substitute goods, price of complementary goods, income of the consumer and taste and preferences of the consumers and expected price in future.

In case of change in the quantity demand, there will be movement along the demand curve and in case of change in the demand, there will be shift of the demand curve.

Hence it can be said that a change in demand means a shift in the demand curve while change in the quantity demanded means a movement along the demand curve are correct.

Since the elasticity of demand can be defined as the measurement of the degree of the responsiveness of the quantity demand due to the change in the price level.

Price elasticity of demand= % change in the quantity demand/ % change in the price

The price elasticity for the necessary good is inelastic and for luxury good, it is elastic.

Determinants of elasticity of demand are;

Availability of substitutes; The goods which have many substitutes, has elastic demand while the goods which has no substitutes, has inelastic demand.

2.

Types of goods;

The necessary goods have inelastic demand while luxury goods have elastic demand.

3.

Availability of Substitutes: The substitutes are the goods which can be used in place of each another. The goods which have close substitutes, these goods have elastic demand.

On the other hand, if there are no close substitutes for a product, then its demand is said to be inelastic.

4.

Number of uses of a commodity: The goods which have many

uses of a commodity, the elasticity of demand of this will be elastic. On the other hand, if there is a single use of commodities, then this kind of goods have inelastic demand.

It means that elasticity of demand is likely to be greater if the product is a luxury, rather than necessity.

If Ed is greater than 1, then the demand is elastic.

If Ed is less than 1, then the demand is elastic.

If Ed is equal to 1, then the demand is unit elastic.

If Ed is equal to 0, then the demand is perfectly inelastic.

If Ed is infinity, then the demand is perfectly elastic.

As it has been given that business firms sell a good at the price of Rs 450. The firm has decided to reduce the price of a good to Rs 350. Consequently, the quantity demanded the goods rose from 25,000 units to 35,000 units.

It means that

P1=450

P2=350

Q1=25,000

Q2=35,000

% change in price=[ (P2-P1)/P1]*100

=[(350-450)/450]*100

=(-100*100)/450

=-22.22%

% change in quantity demand=[ (Q2-Q1)/Q1]*100

=[(35,000-25,000)/25,000]*100

=(10,000*100)/25,000

=40%

Price elasticity of demand=%change in the quantity demanded/ % change in the price

=40%/(-22.22%)

=(-1.80)

Hence price elasticity of demand is -1.80. The negative sign shows an inverse relationship between price and quantity demanded.