2.11 : Ed through Percentage Method

Price elasticity of demand measures the responsiveness of the quantity demanded to a change in price. It is computed as the ratio of the percentage change in quantity demanded to the percentage change in price.

Mathematically, it is represented as E-D equals delta Q by Q over delta P by P.

This equation yields a negative value, indicating an inverse relationship between price and quantity demanded.

Consider a family that used to purchase 50 gallons of gasoline every month at 3 dollars per gallon.

If the price increases to 8 dollars per gallon, the family reduces its consumption to 40 gallons.

The numerator part can be calculated from the percentage change in quantity demanded.

Similarly, the denominator part is the percentage change in price.

Taking their ratio gives the price elasticity of demand to be -0.12.

This means that for every 1% increase in price, the quantity of gasoline demanded decreases by 0.12%.

This suggests the family is not very responsive to price changes for gasoline.