QUESTION 6 Show
(a) Distinguish between the following pairs of concepts: (i) elastic demand and inelastic demand (ii) income elasticity of demand and cross elasticity of demand. (b) Using diagrams, explain how an increase in price will affect the total revenue of a producer if the demand for his product is: (i) price elastic; (ii) price elastic. Observation This question was the least attempted in the paper and the performance of candidates were below average. Majority of the candidates were able to differentiate between elastic demand and inelastic demand, income elasticity and cross elasticity but most of them could not explain the effect of an increase in price on the total revenue of a producer when the price of his product is elastic and inelastic using diagrams in the (b) part of the question. Candidates were expected to answer thus to score maximum marks in this question. (a)(i) Demand is elastic if a change in the price of a commodity results in a more than proportionate change in quantity demanded. On the other hand, demand is inelastic if a change in the price of a commodity results in a less than proportionate change in quantity demanded. (ii) Income elasticity of demand refers to the degree of responsiveness of quantity demanded of a commodity to a change in the income of the consumer. (b)(i) If the demand is elastic, an increase in price will result in a more than proportionate fall in quantity demanded. By this, the producer’s revenue will fall. (ii) If the demand is inelastic, an increase in price will result in a less than proportionate fall in quantity demanded. By this, the producer’s total revenue will rise. As shown in the diagram below, quantity demanded falls from 0Q1 to 0Q2 after price increased from 0P1 to 0P2 . TR before the price increase was the area of rectangle OP1TQ1.TR after the price increase is the area of rectangle 0P2SQ2. Clearly 0P1TQ1<0P2SQ2.i.e. TR1 < TR2. If you're seeing this message, it means we're having trouble loading external resources on our website. If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked. Price elasticity of demand is a measurement of the change in the consumption of a product in relation to a change in its price. Expressed mathematically, it is: Price Elasticity of Demand = Percentage Change in Quantity Demanded / Percentage Change in Price Economists use price elasticity to understand how supply and demand for a product change when its price changes. Besides demand, supply also has an elasticity, known as price elasticity of supply. Price elasticity of supply refers to the relationship between change in supply and change in price. It's calculated by dividing the percentage change in quantity supplied by the percentage change in price. Together, the two elasticities combine to determine what goods are produced at what prices.
Economists have found that the prices of some goods are very inelastic. That is, a reduction in price does not increase demand much, and an increase in price does not hurt demand either. For example, gasoline has little price elasticity of demand. Drivers will continue to buy as much as they have to, as will airlines, the trucking industry, and nearly every other buyer. Other goods are much more elastic, so price changes for these goods cause substantial changes in their demand or their supply. Not surprisingly, this concept is of great interest to marketing professionals. It could even be said that their purpose is to create inelastic demand for the products they market. They achieve that by identifying a meaningful difference in their products from any others that are available. If the quantity demanded of a product changes greatly in response to changes in its price, it is elastic. That is, the demand point for the product is stretched far from its prior point. If the quantity purchased shows a small change after a change in its price, it is inelastic. The quantity didn’t stretch much from its prior point. The more easily a shopper can substitute one product for another, the more the price will fall. For example, in a world in which people like coffee and tea equally, if the price of coffee goes up, people will have no problem switching to tea, and the demand for coffee will fall. This is because coffee and tea are considered good substitutes for each other. The more discretionary a purchase is, the more its quantity of demand will fall in response to price increases. That is, the product demand has greater elasticity. Say you are considering buying a new washing machine, but the current one still works; it's just old and outdated. If the price of a new washing machine goes up, you’re likely to forgo that immediate purchase and wait until prices go down or the current machine breaks down. The less discretionary a product is, the less its quantity demanded will fall. Inelastic examples include luxury items that people buy for their brand names. Addictive products are quite inelastic, as are required add-on products, such as ink-jet printer cartridges. One thing all of these products have in common is that they lack good substitutes. If you really want an Apple iPad, a Kindle Fire won’t do. Addicts are not dissuaded by higher prices, and only HP ink will work in HP printers (unless you disable HP cartridge protection). The length of time that the price change lasts also matters. Demand response to price fluctuations is different for a one-day sale than for a price change that lasts for a season or a year. Clarity of time sensitivity is vital to understanding the price elasticity of demand and for comparing it with different products. Consumers may accept a seasonal price fluctuation rather than change their habits. Price elasticity of demand can be categorized according to the number calculated by dividing the percentage change in quantity demanded by the percentage change in price. These categories include the following:
Data: Khan Academy As a rule of thumb, if the quantity of a product demanded or purchased changes more than the price changes, the product is considered to be elastic. (For example, the price goes up by 5%, but the demand falls by 10%.) If the change in quantity purchased is the same as the price change (say, 10%/10% = 1), the product is said to have unit (or unitary) price elasticity. Finally, if the quantity purchased changes less than the price (say, -5% demanded for a +10% change in price), then the product is deemed inelastic. To calculate the elasticity of demand, consider this example: Suppose that the price of apples falls by 6% from $1.99 a bushel to $1.87 a bushel. In response, grocery shoppers increase their apple purchases by
20%. The elasticity of apples is thus: 0.20/0.06 = 3.33. The demand for apples is quite elastic. Price elasticity of demand is the ratio of the percentage change in quantity demanded of a product to the percentage change in price. Economists employ it to understand how supply and demand change when a product’s price changes. If a price change for a product causes a substantial change in either its supply or demand, it is considered elastic. Generally, it means that there are acceptable substitutes for the product. Examples would be cookies, luxury automobiles, and coffee. If a price change for a product doesn’t lead to much if any change in its supply or demand, it is considered inelastic. Generally, it means that the product is considered to be a necessity or a luxury item with addictive constituents. Examples would be gasoline, milk, and iPhones. Knowing the price elasticity of demand of a good allows someone selling that good to make informed decisions about pricing strategies. This metric provides sellers with information about consumer pricing sensitivity. It is also key for makers of goods to determine manufacturing plans as well as for governments assessing how to impose taxes on goods. When the proportionate change in quantity demand is exactly the same as change in the price is called as?According to the types of elasticity of demand, when the change in the quantity demanded is exactly proportionate to the change in the price, the elasticity of demand will be equal to one.
When proportionate change in price brings about more than proportionate change in demand is called as?What Is Price Elasticity of Demand? Economists use price elasticity to understand how supply and demand for a product change when its price changes. 1 Besides demand, supply also has an elasticity, known as price elasticity of supply.
When the proportional change in the demand of a commodity is less than the proportional change in the price of the commodity then?Demand is said to be inelastic, When the demand for a good is less responsive to its price. In this case, the percentage change in the demand for a good is less than the percentage change in its price and |ed| < 1.
When a change in the price of one commodity results in the change of demand of other commodity it is known as which demand?If demand of the commodity changes with the change in price, it is known as price elasticity. For example if the demand of cars falls with the change in price, it is known as price elasticity as demand responded to the price change.
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When a proportionate change in quantity demanded of a commodity and a proportionate change in price relates to *?
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