Calculate and comment on the nature of the price elasticity of demand, if, with a rise in the price of Good X from Rs. 10 to Rs. 12, the quantity demanded falls by 40%.

OR

‘As the price of good falls, the resulting increased purchasing power may be a reason for the increase in quantity demanded'. Do you agree with the given statement? Give the reason for your answer.

Price elasticity of demand = Percentage in Quantity demanded /Percentage change in price

Percentage change in quantity demanded is 40%

Percentage change in price = Change in Price/Price of the commodity

= 12-10/12*100

= 2/10*100

= 20

Therefore Price elasticity (e_P) = 40/20

= 2

When price elasticity of demand is greater than 1 then the good is said to be elastic. For the good, when there is a small change in the price of the commodity it will lead to more than the proportionate change in demand. This means when the price of the commodity decreased by 20% then the Quantity demanded increased by increased by 40%.

OR

When the price of the good falls it will simultaneously increase the purchasing power. This is because the income of the consumer is limited or given, then the consumer cannot afford the things beyond his budget. Therefore when there is a decrease in the price of the good then the consumer more of the commodity than he was buying before because of an increase in the real income.

Therefore there will be an increase in the quantity demanded of the good when the price of the good falls. This is due to the increase in the real income or purchasing power when there is a decrease in the price of the commodity.