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How to Calculate Price Elasticity of Demand? – Explained!

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Price elasticity of demand refers to the degree of change in the demand for a product with respect to change in the given price, while keeping other determinants of demand at constant.

In other words, price elasticity of demand denotes the ratio of percentage change in the demand for a product to a percentage change in its price.

The price elasticity of demand (ep) can be expressed by the following formula:

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ep = Percentage change in quantity demanded/Percentage change in price

Percentage change in quantity demanded = New quantity demanded (∆Q)/Original quantity demanded (Q)

Percentage change in price = New price (∆P)/Original Price (P)

Therefore, the price elasticity of demand can be symbolically represented as:

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ep = ∆Q/Q : ∆P/P

ep = ∆Q/Q * P/∆P

ep = ∆Q/∆P * P/Q

Change in demand (∆Q) is the difference between the new demand (Q1) and original demand (Q).

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It can be calculated by the following formula:

∆Q = Q1 – Q

Similarly, change in price is the difference between the new price (P1) and original price (P).

It can be calculated by the following formula:

∆P = P1 – P

Let us understand the concept of price elasticity of demand with the help of some examples.

Demand Schedule for Coffee

Calculate the price elasticity of demand for coffee.

Solution:

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P (original price) = Rs. 20

Q (original demand) = 10 kgs

P1 (new price) = Rs. 22

Q1 (new demand) = 9 kgs

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Therefore, change in price of coffee is:

∆P = P1 -P

∆P = 22 – 20

∆P = 2

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Similarly, change in quantity demanded for coffee is:

∆Q = Q1 – Q

∆Q = 9 – 10

∆Q = -1

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The change in demand shows a negative sign, which can be ignored. This is because of the reason that the relationship between price and demand is inverse that can yield a negative value for price or demand.

Price elasticity of demand for coffee is:

ep = ∆Q/∆P * P/Q

ep = 1/2 * 20/10

ep = 1

Therefore, price elasticity of demand for coffee is 1.

Example 2:

Calculate the price elasticity of demand of an ABC product, whose demand schedule is given in Table-2:

Demand Schedule

Solution:

P (original price) = 60

Q (original demand) = 100

P1 (new price) = 70

Q1 (new demand) = 90

Therefore, change in price is:

∆P = P1 – P

∆P = 70 – 60

∆P = 10

Similarly, change in quantity demanded is:

∆Q = Q1 – Q

∆Q = 90 – 100

∆Q = -10

The change in demand shows a negative sign, which can be ignored. This is because of the reason that the relationship between price and demand is inverse that can yield a negative value of price or demand.

Price elasticity for demand for the product is:

ep = ∆Q/∆P * P/Q

ep = 10/10 * 60/100

ep = 0.6

Therefore, price elasticity of demand for the product is 0.6.

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