Question

Below is given a demand equation Q = – 6P + 400
Calculate price elasticity of demand if price is (i) Rs. 4, (ii) Rs. 10 and, (iii) Rs. 15. Is the demand at these prices elastic or inelastic ?

Answer 1

A most appropriate way of calculating price elasticity of demand in such cases is point elasticity method. This consists of the following steps:
(i) Calculate P₁ (Price at which quantity demanded is zero). When Q is Zero.
(ii) Calculate the difference between ruling price (P₂) and the price at which quantity demanded is zero (P₁), i.e., calculate P₂ – P₁.
(iii) Divide the ruling price (P₂) by the difference as obtained in (2) above.
Thus, the formula for calculating price elasticity of demand will be as follows: