Price elasticity of demand (PED) is the ratio of percentage change in quantity demanded to the percentage change in price. The consumption of apples decreased from thirty pounds to twenty pounds. This translates into a percentage decrease of 33.33 percent. Whereas, the price increased from $3.50 to $4.00. This translates into a price increase of 12.5%. Therefore
PED of apples = percentage change in quantity demanded / percentage change in price
= -33.33% / 12.5 %
= – 2.66
The Law of Demand states that co-efficient will always come out to be negative. Therefore, it is taken as 2.66 alone in the solution. The price elasticity of demand comes out to be a co-efficient of 2.66. An elasticity coefficient of 2.66 shows that consumers respond a great deal to change in price of apples. As a given percentage change in price of apples results in a greater percentage change in quantity demanded of apples.
A co-efficient greater than one and less than infinity demonstrates that price elasticity of demand is elastic. Since, the price elasticity of demand for apples is 2.66, it is elastic. Demand tends to be elastic if a product has close substitutes with respect to the relevant prices. This indicates that consumers are sensitive with respect to price of apples, and if price increases they switch to close substitute fruits.
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