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Percentage change is a vital concept when analyzing how different factors such as price changes affect the quantity demanded of a good. To calculate the percentage change, you use the formula:

• \( \text{Percentage Change} = \frac{\text{New Value} - \text{Old Value}}{\text{Old Value}} \times 100\% \)


• This formula helps express the change as a part of what's already there.

When analyzing elasticity, the percentage change helps determine how a price shift turns into a change in the quantity demanded. For example, if the price increases by 3%, and the elasticity of demand \(E\) is 0.5, then the effect on quantity demanded can be calculated as a percentage change. It's important to note that a change in price doesn't always translate equally to a change in demand, which is why we use elasticity.

• In the exercise, with a price increase of 3%, the resulting percentage change in quantity demanded was found to be -1.5%.


• This shows that for every 3% change in price, the quantity demanded only changes by 1.5%, in the opposite direction for price increases.

Inelastic demand refers to a situation where the quantity demanded of a good changes by a smaller proportion than the change in price. When demand is inelastic, consumers are less sensitive to price changes. Here, the elasticity of demand \(E = 0.5\) suggests this is true, because the number is less than 1.

• In this context, a 3% price increase results in only a -1.5% decrease in quantity demanded.


• Conversely, a 3% price decrease leads to a +1.5% increase in quantity demanded.

This happens because the necessity or lack of substitute goods makes consumers continue to buy it despite price changes. Inelastic demand often pertains to essential goods, where the demand is less about the cost and more about the need. Inelastic goods exhibit the following traits:

• Few or no substitutes
• Necessities like electricity or water
• Habitual consumption

Understanding that demand is inelastic assists in predicting consumer behavior and setting strategic prices.

The term "quantity demanded" refers to the total amount of a good that consumers are willing to purchase at any given time and price.

• It reflects consumer preference and influences pricing strategies.
• When the price of a commodity changes, knowing the elasticity helps predict how much the quantity demanded will fluctuate.

In the exercise, the quantity demanded changes by -1.5% with a 3% increase in price, indicating fewer people buy the product. Conversely, with a 3% price decrease, the quantity demanded grows by 1.5%, showing increased consumer interest.

• Understanding how quantity demanded shifts can guide businesses in making informed decisions.


• Better grasp of this concept aids in adjusting supply and optimizing inventory levels.

By effectively understanding and calculating the quantity demanded, businesses can respond more efficiently to market trends and consumer needs, ultimately improving profitability and customer satisfaction.