Question

Give the formula for measuring price elasticity of demand according to percentage method.

Hint:

The formula for price elasticity of demand shows how quantity demanded responds to price changes. If the result is greater than 1, demand is elastic.

Answer 1

Step 1: Defining Price Elasticity of Demand (PED):
Price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in its price. It indicates how much the quantity demanded changes when there is a change in the price of the good. If demand is highly responsive to price changes, the good is considered elastic, while if demand is less responsive, the good is considered inelastic.
Step 2: Formula for Price Elasticity of Demand (Percentage Method):
The formula for price elasticity of demand using the percentage method is: \[ E_d = \frac{%\Delta Q}{%\Delta P} \] Where:
- \(E_d\) is the price elasticity of demand,
- \(%\Delta Q\) is the percentage change in quantity demanded,
- \(%\Delta P\) is the percentage change in price.
Step 3: Interpreting the Formula:
- If \(E_d>1\), demand is elastic (quantity demanded changes more than the price change).
- If \(E_d<1\), demand is inelastic (quantity demanded changes less than the price change).
- If \(E_d = 1\), demand is unitary elastic (quantity demanded changes exactly as the price changes).
Step 4: Final Conclusion:
The price elasticity of demand formula using the percentage method is a simple way to measure the responsiveness of demand to price changes, and helps businesses and policymakers understand how price changes will affect sales.