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If P1 = $5, Q1 = 10,000, P2 = $6 and Q2 = 5,000, then at point P2 an estimate of the point price elasticity equals:

Question

If P1 = 5,Q1=10,000,P2=5, Q1 = 10,000, P2 = 6 and Q2 = 5,000, then at point P2 an estimate of the point price elasticity equals:

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Solution

The price elasticity of demand measures the responsiveness of the quantity demanded to a change in price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.

  1. Calculate the percentage change in quantity demanded: (Q2 - Q1) / Q1 = (5,000 - 10,000) / 10,000 = -0.5 or -50%

  2. Calculate the percentage change in price: (P2 - P1) / P1 = (6−6 - 5) / $5 = 0.2 or 20%

  3. Calculate the price elasticity of demand: Price elasticity = % change in quantity demanded / % change in price Price elasticity = -50% / 20% = -2.5

So, at point P2, the estimate of the point price elasticity is -2.5.

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