Use the image to answer the question

Question

Demand for Peanut Butter

$1.60-

41.20

Price

$0.40

Π 100

200

300

400

Quantity

500

600

What is the elasticily of demand for peanut butter when the price changes from $2.00 to $0.40 as shown by this supply and demand curve?

Answer 1

To calculate the price elasticity of demand, we use the formula:

% Change in Quantity Demanded / % Change in Price

From the image, when the price changes from $2.00 to $0.40, the quantity demanded increases from 200 to 600:

% Change in Quantity Demanded = ((600-200)/200) * 100% = 200%

% Change in Price = (($0.40 - $2.00) / $2.00) * 100% = -80%

Therefore,

Price Elasticity of Demand = 200% / -80% = -2.5

The price elasticity of demand is -2.5. This means that the demand for peanut butter is relatively elastic, as the quantity demanded is very responsive to changes in price.