Question

When the price of a good falls from Rs 30 to Rs 25, the consumer continues to purchase the same quantity of the good. What will be the price elasticity of demand for this good?

• A. Unitary elastic
• B. Perfectly elastic
• C. Perfectly inelastic
• D. Elastic

Answer 1

The Correct Option is C

The price elasticity of demand measures how the quantity demanded of a good responds to a change in its price. It is defined as the percentage change in quantity demanded divided by the percentage change in price: 

E_d = \(\frac{\%\Delta Q_d}{\%\Delta P}\)

In this scenario, the price of the good decreases from Rs 30 to Rs 25, but the quantity demanded does not change. Let's break down the calculation:

Variable	Initial Value	New Value
Price	Rs 30	Rs 25
Quantity Demanded	Q (unchanged)	Q

Step 1: Calculate the percentage change in price:

\(\%\Delta P = \frac{\text{New Price} - \text{Old Price}}{\text{Old Price}} \times 100 = \frac{25 - 30}{30} \times 100 = -16.67\%\)

Step 2: Calculate the percentage change in quantity demanded:

\(\%\Delta Q_d = \frac{\text{New Quantity} - \text{Old Quantity}}{\text{Old Quantity}} \times 100 = \frac{Q - Q}{Q} \times 100 = 0\%\)

Step 3: Calculate the price elasticity of demand using the formula:

E_d = \(\frac{0\%}{-16.67\%} = 0\)

Since the price elasticity of demand is 0, the demand is Perfectly Inelastic. This indicates that the quantity demanded does not change regardless of the price change.

Answer 2

Price elasticity of demand measures how much the quantity demanded of a good or service changes in response to a change in its price. It is a crucial concept in economics as it helps to understand how price changes affect consumer behavior and, ultimately, the revenue of producers.

If the quantity demanded remains constant despite a change in price, the demand is considered perfectly inelastic. In other words, no matter how much the price increases or decreases, the amount of the good demanded does not change. This situation typically occurs with necessities or products for which no substitutes are available, such as life-saving medications or essential goods.

On the other hand, if demand is highly responsive to price changes, it is considered elastic, where a small change in price leads to a large change in quantity demanded. Understanding the price elasticity of demand allows businesses and policymakers to make more informed decisions regarding pricing, taxation, and production strategies.