Use the image to answer the question
Demand for Peanut Butter
$1.60-
41.20
Price
$0.40
Π 100
200
300
400
Quantity
500
600
What is the elasticily of demand for peanut butter when the price changes from $2.00 to $0.40 as shown by this supply and demand curve?
To calculate the price elasticity of demand, we use the formula:
% Change in Quantity Demanded / % Change in Price
From the image, when the price changes from $2.00 to $0.40, the quantity demanded increases from 200 to 600:
% Change in Quantity Demanded = ((600-200)/200) * 100% = 200%
% Change in Price = (($0.40 - $2.00) / $2.00) * 100% = -80%
Therefore,
Price Elasticity of Demand = 200% / -80% = -2.5
The price elasticity of demand is -2.5. This means that the demand for peanut butter is relatively elastic, as the quantity demanded is very responsive to changes in price.