CMA Foundation · Fundamentals of Business Economics and Management · Theory of Demand and Supply
A Pune bakery sells 400 loaves a day at ₹40 per loaf. When it cuts the price to ₹36, daily sales rise to 480 loaves. Using the percentage (simple) method, the price elasticity of demand is:
Price elasticity is 2.0. Quantity demanded rises from 400 to 480, a 20 percent increase, while price falls from ₹40 to ₹36, a 10 percent decrease. Dividing the percentage change in quantity by the percentage change in price gives 2, so demand is elastic.
- A0.5
- B1.5
- C2.0Correct
- D2.5
Explanation
Percentage change in quantity = (480-400)/400 = 20%. Percentage change in price = (36-40)/40 = -10%. Elasticity = 20/10 = 2.0 in absolute terms. The value 0.5 results from inverting the ratio, i.e. dividing the price change by the quantity change.
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