Suppose the price elasticity of demand is -2. What would be the impact on quantity demanded if the price of the good increases by 20 percent?
To start, lets revisit the basic equation to calculate the Price Elasticity of Demand (PEoD). The equation is:
PEoD = (% Change in Quantity Demanded) / (% Change in Price) or abbreviated it would look like this:
PEoD = % change D / % change P
In the question we are given two of the three values in the equation.
PEoD = -2
% Change in Price = 20%
We then insert the given quantity for each item given into the equation.
-2 = % change D / 20%
When you solve for % change D the answer comes out as a -10% on the quantity demanded.