Essay: How is Price Elasticity of Demand Calculated

Essay: How is Price Elasticity of Demand Calculated

Sample Essay

It is computed as follows:

PRED= %change in quantity demanded /%change in price

%CQD = (new Qdemanded- old Qdemaded)/old Qdemanded

= (20-35)/35

= -15/35

= -0.43

% change in price= (new price-old price)/ old price

= (3.50-3.00)/ 3.00

= 0.50/3.00

= 0.17

It therefore follows that price elasticity of demand: = -0.43/ 0.17

= -2.53 = 2.53

This shows that as price changes by one unit, quantity demanded changes by 2.53 but on the opposite side implying that as price increases, demand decreases. It should be noted that in this case, PED is 2.53 with the negative sign ignored since PED is usually measured in absolute terms.

The demand for paint is elastic because the price has only changed by a very small value but the quality demanded has dropped drastically. The price has only changed by a small value of 0.5 cents and this has made the demand decrease by fifteen units, which is quite a huge amount resulting to a PED of more than one.

If the type of elasticity was unitary, the calculation of the price elasticity of demand shown above could have resulted to one. If the price elasticity of demand was inelastic, there could have had very insignificant change in quantity demanded as the price increases; the PED at this point results to figure which is less than one.. Since the price increase but by a very small margin and the quantity decreases by a very big difference, it follows that the price elasticity of demand is elastic (Low, 2000).

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