Elasticity of Demand

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Questions:

Generic 3

9 x 3 = 27

A 5 percent fall in the price of a good, raises its demand from 300 units to 318 units. Calculate its price elasticity of demand.

The demand for a good rises by 20 percent as a result· of fall in its price. Its price elasticity of demand is (-)0.8. Calculate the percentage fall in price.

A consumer buys 18 units of a good at a price of Rs 9 per unit. The price elasticity of demand for the good is (-)1. How many units the consumer will buy at a price of Rs 10 per unit? Calculate.

The market demand for a good at Rs 5 per unit is 50 units. Due to increase in price, the market demand falls to 30 units. Find out the new price if the price elasticity of demand is (-)2.

When price of a good is Rs 7 per unit, a consumer buys 12 units. When price falls to Rs 6 per unit he spends Rs 72 on the good. Calculate price elasticity of demand by using the percentage method. Comment on the likely shape of demand curve based on this measure of elasticity.

Suppose the price elasticity of demand for a good is -0.2. If there is a 5% increase in the price of the good, by what percentage will the demand for the good go down?

Consider the demand curve D(P) = 10 - 3p. What is the elasticity at price 5/3?

Consider the demand for a good. At price Rs 4, the demand for the good is 25 units. Suppose price of the good increases to Rs 5, and as a result, the demand for the good falls to 20 units. Calculate the price elasticity?

Explain price elasticity of demand.

1 Marks

5 x 1 = 5

10.

What is price elasticity of demand for life saving drugs?

11.

Demand for salt is nearly perfectly inelastic. If the government imposes a tax of 10% on salt what shall be the effect on quantity demanded of salt? Why?

12.

How will a rich household's demand for low-quality rice respond to an increase in income of the household?

13.

Define perfectly inelastic demand.

14.

Suppose, there was 4% decrease in the price of a good and as a result, the expenditure on the goods increased by 2%. What can you say about the elasticity of demand?

Multiple Choice Question

5 x 1 = 5

15.

The price elasticity of demand is defined as the responsiveness of:

(a)

price to a change in quantity demanded.

(b)

quantity demanded to a change in price

(c)

price to a change in income.

(d)

quantity demanded to a change in income

16.

The price elasticity of demand for hamburger is

(a)

the change in the quantity demanded of hamburger when the hamburger increases by 30 paise per rupee

(b)

the percentage increase in the quantity demanded of hamburger when the price of hamburger falls by 1 percent per rupee.

(c)

the increase in the demand for hamburger when the price of hamburger falls by 10 percent per rupee.

(d)

the decrease in the quantity demanded of hamburger when the price of hamburger falls.by 1 percent per rupee

17.

Identify the coefficient of price elasticity of demand when the percentage increase in the quantity of good demanded is smaller than the percentage fall in its price

(a)

Equal to one.

(b)

Greater than one.

(c)

Smaller than one

(d)

Zero

18.

Identify the factor which generally keeps the price elasticity of demand for a good low

(a)

Variety of uses for that good

(b)

Its low price

(c)

Close substitutes for that good

(d)

High proportion of the consumer's income spent on it

19.

In case of a straight line demand curve meeting the two axes, the price elasticity of demand at the midpoint of the line would be:

(a)

(b)

(c)

1.5

(d)

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Answers Key:

Generic 3

9 x 3 = 27

Original Quantity (Q)= 300 units	% Change in Price = -5%
Change in Quantity (\(\triangle\)Q) = 18 units	Elasticity of Demand (ED) =?
NewQuantity (Q_l) = 318 units

Percentage change in demand=\({\triangle Q\over Q}\times 100={18\over318}\times100=6\%\)
Price Elasticity of Demand (ED)\(={\%Change\ in\ quantity\ demanded \over \%Change\ in\ price}={6\% \over -5\%}\)
Price Elasticity of Demand (ED) = (-) 1.2
ED = (-) 1.2; Demand is more elastic because ED > 1.

%Change in Demand = 20%	% Change in Price =?
Elasticity of Demand (ED)= -0.8

\((-)0.8={20\%\over \% Change\ in\ Price}\)Percentage Fall in Price = 25%
Price for the goods will fall by 25%

Original Quantity (Q)= 18 units	Original Price (P)= Rs 9
New Quantity (Q₁) = ?	New Price (P₁) = 10
Change in Quantity (\(\triangle\)Q) =?	Change in Price (\(\triangle\)P) = 1
Elasticity of Demand (ED)= (-)1

\(PED={\triangle Q\over \triangle P}\times{P\over Q}\)
\(-1={\triangle Q\over 1}\times {9\over 18}\)
\(-2=\triangle Q\)
As New Price is increasing from 9 to 10, quantity demanded must decrease by\(\triangle\)Q. New Quantity = Initial Quantity + \(\triangle\)Q = 18 + (-2) = 16 At Price= 10, Quantity demanded = 16.

Original Quantity (Q)= 50 units	Original Price (P)= Rs 5
New Quantity (Q₁)= 30 units	New Price (P₁) =?
Change in Quantity (\(\triangle\)Q)= -20 units	Change in Price (\(\triangle\)P)= \(\triangle\)P
Elasticity of Demand (ED)= (-)2

Price Elasticity of demand (ED)= \({\triangle Q\over \triangle P}\times {P\over Q}\)
\(-2={-20\over \triangle P}\times{5\over 50}=\triangle P=Rs1\)
As the quantity demanded is decreasing, price will increase. It means, New Price = Original Price (P) + Change in Price (\(\triangle\)P) = 5 + 1 = Rs 6 New Price = Rs 6

Initial Price (P) = 7	Initial Expenditure = 84	Initial Quantity (Q)= 12
New Price (P₁) = 6	New Expenditure = 72	NewQuantity (Q₁)=\({Exp.\over Price}={72\over6}12\)
\(\triangle P=(-)1\)		\(\triangle Q=0\)

\(PED={\triangle Q\over \triangle P}\times {P\over Q}={0\over(-)}1\times {7\over 12}=0\)
ED is perfectly inelastic as quantity demanded does not change at all in response to change in price. Thus, its demand curve will be vertical/parallel to y-axis.

%Change in Demand =?	% Change in Price = 5%
Elasticity of Demand (ED) = (-) 0.2

Price Elasticity of Demand (ED) = \({\% \ change \ in \ quntity \ Demand \over \% \ Change \ in \ price}\)
\((-)0.2={\% \ change \ in \ quntity \ Demand \over \% 5}\)
Percentage fall in demand = 1%
Demand for the piece of goods will fall by 1%.

Given Q = 10 - 3P.
When P = \({5\over3},Q=10-3\times{5\over3}=5\)
Differentiating Q with respect to P,
we get,
We know,\({\triangle Q\over \triangle P}=-3\)
\(ED={\triangle Q\over \triangle P}\times {P\over Q}=-3\times{5/3\over 5}\)
\(=-3\times{5\over3}\times{1\over5}=[-]1\)
Negative Sign of ED indicates that inverse relationship between price and quantity demanded.
PED = 1 [Unitary elastic demand].

Original Quantity (Q) = 25 units	Original Price (P) = Rs 4
Fall in Quantity (\(\triangle\)Q) = - 5 units	Rise in Price (DP) = Rs 1
New Quantity (Q₁) = 20 units	New Price (P₁)=Rs 5
Elasticity of Demand (ED) =?

Price Elasticity of demand (ED) \(={\triangle Q\over \triangle P }\times {P\over Q}={-5\over 1}\times {4\over25}=(-)0.8\)
ED = (-) 0.8 (Demand is less elastic as ED < 1)
Negative sign indicates the inverse relationship between price and quantity demanded.

The degree of responsiveness of quantity demanded to changes in price of commodity is known as price elasticity of demand.

1 Marks

5 x 1 = 5

10.

()
Life saving drugs are essential. So a change in their price will not affect in its quantity demanded. That is ED = 0. Life saving drugs have a perfectly inelastic demand.

11.

()
Quantity demanded of salt will remain unchanged. Salt is a relatively low-priced commodity for which there is no good substitute available.
Value: Analytic

12.