The price of a commodity increases by 10%, its demand drops by 12%. What is the nature of price elasticity of demand?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Price Elastic.
Price Elasticity of Demand (PED) is calculated using the formula:
PED = (% change in quantity demanded) / (% change in price)
Here,
% change in quantity demanded = –12%
% change in price = +10%
So,
PED = |–12 / 10| = |–1.2| = 1.2
The absolute value of elasticity is greater than 1, which means demand is price elastic — a small change in price causes a larger percentage change in quantity demanded.