question_answer

When price of good is Rs. 7 per unit a consumer buys 12 units. When price falls to Rs. 6 per unit he spends Rs. 72 on the good. Calculate price elasticity of demand by using the percentage method. Comment on the likely shape of demand curve based on this measure of elasticity.

Answer:

Quantity (Q)	Price (P)	Total Expenditure (TE)
12	Rs. 7	84
12	Rs. 6	72
We know
Price \[\times \] Quantity = Total Expenditure
or,        6 \[\times \] Quantity = 72
or,        Quantity =12
Now,     \[{{e}_{d}}=\frac{\text{Percentage}\,\,\text{change}\,\,\text{in}\,\,\text{quantity}}{\text{Percentage}\,\,\text{Change}\,\,\text{in}\,\,\text{price}\,\,}\]
Percentage change in quantity
\[=\frac{\Delta Q}{P}\,\,\times \,\,100=\frac{12-12}{12}\times 100=0\]
Percentage change in price
\[=\frac{\Delta P}{P}\,\,\times \,\,100=\frac{6-7}{7}\,\,\times \,\,100=14.28\]
Substituting the values in the formula of price elasticity of demand,
so,        \[{{e}_{d}}=\frac{0}{14.28}=0\]
Thus, the demand is perfectly inelastic.
As the demand is perfectly inelastic, so the demand curve is a vertical straight line parallel to the price - axis.