CA Foundation · Business Economics · Theory of Demand and Supply
When the price of a good rises from ₹40 to ₹50, quantity demanded falls from 200 units to 150 units. Using the simple percentage method with the original price and quantity as base, the price elasticity of demand (in absolute terms) is:
The price elasticity is 1.00, meaning unitary elasticity. Quantity falls by 50 on a base of 200, which is 25 percent, and price rises by 10 on a base of 40, which is also 25 percent. Dividing 25 by 25 gives one.
- A0.80
- B1.00Correct
- C1.25
- D2.00
Explanation
Percentage change in quantity = 50/200 × 100 = 25%. Percentage change in price = 10/40 × 100 = 25%. Elasticity = 25/25 = 1.00, unitary elastic. The value 0.80 comes from inverting the ratio, and 1.25 or 2.00 come from using the wrong base or the wrong changes.
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