Suppose that when the price of water rises by 30 percent, the quantity demanded falls by 10 percent. The price elasticity of demand for water is ____________, making water an _______________ good (in this example).
Ans) Price elasticity of demand is the responsiveness of quantity demanded to change in price. If price elasticity is negative, good is normal good. PED is positive for veblen and giffens good, as they defy law of demand.
Further, if PED is less than 1, good is inelastic. If PED is 1, good is unit elastic and if PED is more than 1, good is elastic.
PED = % change in quantity demanded ÷ %change in price
PED = (-10%)/(30%) = -0.33
Therefore, water has PED of -0.33 ,making water inelastic good.
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