The price of a product rises from £10 to £12 (an increase of 20%) and the quantity demanded falls from 500 to 400 units (a fall of 20%). What is the price elasticity of demand?
Answer and explanation
Correct answer: C. Unitary: elasticity of 1 in absolute value
- Step 1: % change in price = (£12 − £10) ÷ £10 = +20%.
- Step 2: % change in quantity = (400 − 500) ÷ 500 = −20%.
- Step 3: Elasticity = −20% ÷ +20% = −1, so unitary (absolute value 1).
Answer
Unitary: elasticity of 1 in absolute value.
Why not the others: Elastic demand would require the percentage fall in quantity to exceed the percentage rise in price. Inelastic: less than 1 in absolute value: Inelastic demand would need a smaller percentage change in quantity than in price. Perfectly inelastic: zero: Perfectly inelastic demand would see no change in quantity when price rises.
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