If a rightward shift of the supply curve causes the price to fall by 6 percent and the quantity demanded to rise by 5 percent, the price elasticity of demand is approximately:

If a rightward shift of the supply curve causes the price to fall by 6 percent and the quantity demanded to rise by 5 percent, the price elasticity of demand is approximately:

• A. 0.83
• B. 0.30
• C. 0.60
• D. 1.20

Answer: (A)

The main idea here is price elasticity of demand, which measures how much quantity demanded responds to a price change. When the supply curve shifts right, the market price falls and the quantity bought and sold rises to a new equilibrium. To find elasticity, look at the percentage changes that result from that price change: price decreases by 6 percent, while quantity demanded increases by 5 percent. Elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price. So it’s 5% divided by -6%, which equals approximately -0.83. We usually report the magnitude, so about 0.83. This means demand is inelastic in this case—the quantity demanded changes by less than proportionally to the price change.

The main idea here is price elasticity of demand, which measures how much quantity demanded responds to a price change. When the supply curve shifts right, the market price falls and the quantity bought and sold rises to a new equilibrium. To find elasticity, look at the percentage changes that result from that price change: price decreases by 6 percent, while quantity demanded increases by 5 percent.

Elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price. So it’s 5% divided by -6%, which equals approximately -0.83. We usually report the magnitude, so about 0.83. This means demand is inelastic in this case—the quantity demanded changes by less than proportionally to the price change.