How is Price Elasticity of demand -1.25 for soda calculated?? What formula and m

Question

How is Price Elasticity of demand -1.25 for soda calculated?? What formula and model components are considered for calculation?
How is Price Elasticity of demand -1.25 for soda calculated?? What formula and model components are considered for calculation? TABLE 2: through Assumptions Table Demand Elasticity and Te Consumption, Price (per fuid ounce) National Consumption Sugary Beverage Soda California Censumption Price Elasticity of oances/ year) Tax I Thre Tax (per fluid ounce) from your sources) nces/year) Demand 0.02 0.02 S 02 0.02 S 0.02 S 002 S 0.08661,22302,800,000 00865 203,456,000,000 148,198,400,000 45,376,000,000 58,880,000,000 206,400,000 102,828,741,072 17,105,659,170 12,459,850,385 3,815,008,604 4,950,363,774 6,659,315,442 554,225,509 1.25 1.41 2.44 1.21 1.21 1.21 Sports Drinks Enerky Drinks Enhanced Water 00765 02726 00869 0.0607 to-Drink Tea to-Drink Coffee 002 0.2464 1,764,761,600,000 148,373,163,955

Explanation / Answer

Price elasticity can be defined a response change in quantity demanded of a good relative to any change in its price.   

A price elasticity of demand can be calculated as

Ed = ((current quantity - previous quantity ) / previous quantity) / ((current price - previous price ) / previous price)

or

Ed = %change in quantity / % change in price

Let's try to understand the given scenario with an example. Suppose the price of soda is $10 for a can and the quantity demanded at the price is 10 cans. Looking at the harmful effects of soda government thought of putting a tax on soda which increases its price by 20% i.e. $2 for a can making its price $12. Because of the increase in price, the demand for Soda fell by 50% and the new demand is 5 can of soda.

Now putting the values in formula mentioned above

Ed = % change in quantity / % change in price

Ed= - 50% / +20

Ed = -2.5

This means the demand for soda is negatively proportional. Any increase in the price of Soda will reduce the demand for it. People will simply move on to some other options like coffee, chocolate shake or anything else which they think is a substitute for Soda.

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