Do the calculation when the price of gasoline rises by 5% and the quantity of gasoline purchased falls by 1%. The price elasticity of demand is equal to , and demand is described as .

0.2, relatively inelastic

Explanation:

Price elasticity of demand is the degree of responsiveness of demand for a product/service to a unit change in the price of that product/service. Mathematically:

Price elasticity of demand = change in demand/change in price.

Price elasticity of demand can be perfectly elastic if elasticity is infinity, perfectly inelastic if elasticity is 0, relatively elastic if elasticity is greater than 1, unitary elastic if it is equal to 1 and relatively inelastic if it is less than 1.

For gasoline,

Change in price = 5%

Change in quantity demanded = 1%

Hence,

Price elasticity of demand for gasoline = 1/5 = 0.2

The price elasticity of demand for gasoline is 0.2 and can be described as being relatively inelastic.

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