Q.The price of a commodity falls from ₹20 to ₹18 per unit, and as a result the quantity demanded rises from 40 units to 50 units per week. Calculate the price elasticity of demand by the percentage method and state its degree.

Price elasticity of demand compares the percentage change in quantity demanded to the percentage change in price.

Step 1 — Percentage change in quantity demanded.

Step 2 — Percentage change in price.

Step 3 — Price elasticity of demand.

Ignoring the sign (as is conventional), $E_d = 2.5$.

Since $E_d = 2.5 > 1$, demand for this commodity is relatively elastic.

Cross-check by the total outlay method. Outlay before the price fall $= 20 \times 40 = ₹800$; outlay after $= 18 \times 50 = ₹900$. Since price fell and total outlay rose, demand must be relatively elastic ($E_d>1$) — this agrees with the value 2.5 obtained by the percentage method.

Forgetting to drop the negative sign before comparing $E_d$ to 1 leads students to mis-classify elastic demand as inelastic; also, using the wrong base (new price/quantity instead of the original) in the percentage formula changes the answer — always divide the change by the ORIGINAL value unless the arc/average method is specifically asked for.