Question

If the price of bananas rises from 5 SAR per kg to 15 SAR per kg, the quantity demanded decreases from 500 boxes to 450 boxes. Calculate the price elasticity of demand over this price range. Is the demand for bananas elastic or inelastic?

SOLVE THE QUESTION STEP BY STEP

Answer 1

Initial Price of Bananas(P) = 5 SAR/Kg

Final Price of Bananas(P1) = 15 SAR/Kg

Initial Quantity demanded(Q) = 500 boxes

Final Quantity demanded(Q1) = 450 boxes

So Price Elasticity of Demand = (Change in Quantity Demanded / Change in Price) * (Initial Price / Initial Quantity)

i,e (Q1-Q / P1-P) * (P / Q)

Putting values in the formula, we get

(450-500 / 15-5) * (5 / 500)

= (-50 / 10) * (1 / 100)

= -1 / 20 or (-)0.05

Now further checking for elastic and inelastic

For elastic: Percentage change in Quantity Demanded > Percentage Change in Price

For inelastic: Percentage Change in Quantity Demanded < Percentage Change in Price

Here Percenatge Change in Quantity Demanded = {(Q1-Q) / Q} * 100

i,e {(450-500) / 500} * 100 Or (-)10

Percentage Change in Price = {(P1-P) / P} * 100

i,e {(15-5) / 5} * 100 Or 200

So here we can clearly see that Percentage Change in Price > Percentage Change in Quantity Demanded

Clearly, the demand is inelastic