What is the price elasticity of demand of the commodity from the demand schedule above?
Answer Details
To calculate the price elasticity of demand, we need to use the following formula:
Price elasticity of demand = Percentage change in quantity demanded / Percentage change in price
We can calculate the percentage change in quantity demanded by using the following formula:
Percentage change in quantity demanded = ((new quantity demanded - old quantity demanded) / old quantity demanded) x 100
From the demand schedule above, we can see that the old quantity demanded is 200 kg when the price is N12, and the new quantity demanded is 240 kg when the price is N8. Therefore:
Percentage change in quantity demanded = ((240 - 200) / 200) x 100 = 20%
We can calculate the percentage change in price by using the same formula:
Percentage change in price = ((new price - old price) / old price) x 100
In this case, the old price is N12 and the new price is N8. Therefore:
Percentage change in price = ((8 - 12) / 12) x 100 = -33.33%
Note that the negative sign indicates a decrease in price.
Now we can substitute these values into the formula for price elasticity of demand:
Price elasticity of demand = Percentage change in quantity demanded / Percentage change in price
Price elasticity of demand = 20% / -33.33%
Price elasticity of demand = -0.6
The price elasticity of demand for this commodity is -0.6. This means that a 1% decrease in price leads to a 0.6% increase in quantity demanded, and vice versa. Since the elasticity is greater than 1, demand is considered elastic, meaning that consumers are relatively sensitive to changes in price. In other words, a small change in price can lead to a relatively large change in the quantity demanded.