BUSINESS ECONOMICS
NMIMS Global Access
School for Continuing Education (NGA-SCE)
Course: Business Economics
SEM – I
1. Calculate Elasticity in the following cases:
a) Assume that a business firm sells a product at the price of Rs 500. The firm has decided to reduce the price of the product to Rs 400. Consequently, the demand for the product is raised from 20,000 units to 25,000 units. Calculate the price elasticity of demand.
ANSWER A:
PRICE ELASTICITY OF DEMAND:
MEANING: Price elasticity of demand is a measure of a change in the quantity demanded of a product due to Change in the price of a product in the market.
Price elasticity of demand = Proportionate change in the quantity demanded Proportionate change in price
A percentage change in demand and price is denoted with a symbol
Thus, the formula for calculating the price elasticity of demand is as follows, ep = ^ Q P ^ P Q
Where,
ep = Price elasticity demand
P = Initial Price
P = Change in price
Q = Initial Quantity Demanded Q = Changes in quantity demanded
Here,
P = Rs.500
P = Rs.100 (a fall in price; Rs.500 – Rs.400 = Rs.100)
Q = 20,000 units
Q = 5,000 units (25,000 – 20,000)
By substituting these values in above formula we get: ep = 5,000 500 100 20,000 ep = 25,00,000 20,00,000 ep = 5 4 ep = 1.25
Thus elasticity of demand is greater than 1.
Numerical value of elasticity of demand is >1 it means, It is the type of relative elastic demand
b) Suppose the monthly income of an individual increases from Rs 15,000 to Rs20,000. Now, his demand for clothes increases from 35 units to 40 units. Calculate the income elasticity of demand.
ANSWER B:
INCOME ELASTICTY OF DEMAND:
MEANING: An increase in the income of consumers increases the demand for the product even if the price
School for Continuing Education (NGA-SCE)
Course: Business Economics
SEM – I
1. Calculate Elasticity in the following cases:
a) Assume that a business firm sells a product at the price of Rs 500. The firm has decided to reduce the price of the product to Rs 400. Consequently, the demand for the product is raised from 20,000 units to 25,000 units. Calculate the price elasticity of demand.
ANSWER A:
PRICE ELASTICITY OF DEMAND:
MEANING: Price elasticity of demand is a measure of a change in the quantity demanded of a product due to Change in the price of a product in the market.
Price elasticity of demand = Proportionate change in the quantity demanded Proportionate change in price
A percentage change in demand and price is denoted with a symbol
Thus, the formula for calculating the price elasticity of demand is as follows, ep = ^ Q P ^ P Q
Where,
ep = Price elasticity demand
P = Initial Price
P = Change in price
Q = Initial Quantity Demanded Q = Changes in quantity demanded
Here,
P = Rs.500
P = Rs.100 (a fall in price; Rs.500 – Rs.400 = Rs.100)
Q = 20,000 units
Q = 5,000 units (25,000 – 20,000)
By substituting these values in above formula we get: ep = 5,000 500 100 20,000 ep = 25,00,000 20,00,000 ep = 5 4 ep = 1.25
Thus elasticity of demand is greater than 1.
Numerical value of elasticity of demand is >1 it means, It is the type of relative elastic demand
b) Suppose the monthly income of an individual increases from Rs 15,000 to Rs20,000. Now, his demand for clothes increases from 35 units to 40 units. Calculate the income elasticity of demand.
ANSWER B:
INCOME ELASTICTY OF DEMAND:
MEANING: An increase in the income of consumers increases the demand for the product even if the price