Demand falls by 3 percent when the price is increased by 2 percent. Find the pri

Question

Demand falls by 3 percent when the price is increased by 2 percent. Find the price elasticity of demand and determine if the demand is elastic or inlastic.

Also, another question from me would be if the elasticity is greater than -1, the demand inelastic? On the other hand, if the elasticity is less than -1, demand is elastic? or it's the other way around.

In my Business class, we use -1 as a line, but I am still not sure why the correct answer for this question is the demand is elastic while the elasticity is -1.5. Doesn't negative elasticity means the demand is inelastic? Please help me.

Explanation / Answer

Price elasticity of demand = percent change in quantity demanded/ percent change in price

PE = -3%/2% = -1.5

Demand is price elastic because abs (PE) > 1

We are concerned with the absolute value of price elasticity (sign does not matter) , therefore, when abs (PE) > 1 demand is price elastic and if abs (PE) < 1 , demand is price inelastic.

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