Consider the demand for a good. At price Rs 4, the demand for the good is 25 units. Suppose price of the good increases to Rs 5, and as a result, the demand for the good falls to 20 units. Calculate the price elasticity.

Question

Accepted Answer

> [!TLDR]
> Price elasticity of demand measures the responsiveness of quantity demanded to a price change. Here, a 25% price rise causes a 20% fall in quantity, yielding an elasticity of **–0.8** (inelastic demand).

Price elasticity of demand tells us how sensitive consumers are to a change in price. When price rises, quantity demanded typically falls—but by how much? A large response means demand is elastic (consumers are price-sensitive); a small response means demand is inelastic (consumers will buy roughly the same amount even if price changes). The elasticity coefficient captures this relationship as a ratio: the percentage change in quantity demanded divided by the percentage change in price.

The formula is:

> [!FORMULA]
> $$e_d = \frac{	ext{Percentage change in quantity demanded}}{	ext{Percentage change in price}} = \frac{\Delta Q / Q}{\Delta P / P}$$

Because price and quantity move in opposite directions along a demand curve, elasticity is negative. We often report the absolute value for convenience, but the sign matters economically—it reflects the law of demand.

Now let's calculate step by step.

**Step 1.** Identify the initial and new values.

- Initial price $P_1 = 4$, initial quantity $Q_1 = 25$
- New price $P_2 = 5$, new quantity $Q_2 = 20$

**Step 2.** Compute the change in quantity and the change in price.

$$\Delta Q = Q_2 - Q_1 = 20 - 25 = -5$$

$$\Delta P = P_2 - P_1 = 5 - 4 = 1$$

**Step 3.** Calculate the percentage change in quantity demanded.

$$\frac{\Delta Q}{Q_1} = \frac{-5}{25} = -0.2 = -20\%$$

**Step 4.** Calculate the percentage change in price.

$$\frac{\Delta P}{P_1} = \frac{1}{4} = 0.25 = 25\%$$

**Step 5.** Divide the percentage change in quantity by the percentage change in price.

$$e_d = \frac{-0.2}{0.25} = -0.8$$ …

Q.Consider the demand for a good. At price Rs 4, the demand for the good is 25 units. Suppose price of the good increases to Rs 5, and as a result, the demand for the good falls to 20 units. Calculate the price elasticity.

Concept understanding — Price Elasticity Of Demand

Price Elasticity of Demand: From the Market to Your Pocket

The Intuition First

The Precise Definition (NCERT Standard)

The Five Types of Elasticity

Why Does This Matter? (The "So What?")

Q.Consider the demand for a good. At price Rs 4, the demand for the good is 25 units. Suppose price of the good increases to Rs 5, and as a result, the demand for the good falls to 20 units. Calculate the price elasticity.

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