Question

1. In each case below, what is the value of the price elasticity of demand? Is demand perfectly inelastic, inelastic, unit elastic, elastic or perfectly elastic?
2. 1. Price falls by 10%, quantity demanded rises by 8%
   2. Price rises by 3%, quantity demanded falls by 3%
   3. Price rises by 1%, quantity demanded falls by 5%
   4. Price rises by 5%, quantity demanded collapses to zero
   5. Price falls by 2%, quantity demanded does not change

Answer 1

The formula to calculate PED is:

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

We know if:

PED > 1 , the demand is elastic.

PED < 1 , the demand is inelastic.

PED = 1 , the demand is unit elastic.

PED = 0 , the demand is perfectly inelastic

PED = infinity , the demand is perfectly elastic

a) PED = 8% / 10% = 0.8. Thus, demand is inelastic.

b) PED = 3% / 3% = 1. Thus, demand is unit elastic.

c) PED = 5% / 1% = 5. Thus, demand is elastic.

d) PED = demanded collapses to zero / 5% = Infinity. Thus, demand is perfectly ielastic

e) PED = 0% / 5% = 0. Thus, demand is perfectly inelastic