Practicing Success
Suppose there was a 4% decrease in the price of the good, and as a result, the total expenditure on the goods increased by 2%. What can you say about the elasticity of demand? |
Price elasticity of demand is less than 1 Price elasticity of demand is greater than 1 Price elasticity is equal to 1 None of the above |
Price elasticity of demand is greater than 1 |
Decrease in price= 4%, Rise in expenditure= 2% This implies that due to a reduction in price, the overall expenditure has increased. This implies that the percentage of change in demand has increased more than the percentage decrease in price. Thus elasticity = % change in demand / % change in price. The numerator is more than the denominator. This means that elasticity is more than 1. We can say that small change in price has led to a bigger change in demand and as a result the demand is elastic. |