Question

If an increase in the price of a product from $1 to $2 per unit leads to a decrease in the quantity demanded from 100 to 80 units, then the demand is _____

Answer 1

INELASTIC i.e < 1 . Elasticity of Demand = 0.2

Step-by-step explanation:

Demand Elasticity reflects magnitude of change in demand quantity due to change in price.

ELASTICITY FORMULA : % change in quantity / % change in price

= (ΔQ/ΔP)X P/Q

Elastic Demand : Elasticity > 1 , %change quantity > percentage change price

Inelastic Demand : Elasticity < 1 , % change quantity < % change price .

In this case : P = 1 , Q = 100 , P' = 2 , Q' = 80 , ΔP = 1 , ΔQ = -20 ; Elasticity :-

(ΔQ/ΔP)X P/Q = (20/1) x (1/100) = 20 x 0.01 = 0.2 i.e < 1 [Inelastic Demand]

%change quantity 100% (1/2 x 100) > %change in price 20% (20/100 x 100)

100 / 20 = 0.2 i.e < 1 [Inelastic Demand]