Part 2- Economics Chapter on Price Elasticity of Demand
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Questions and Answers

If the demand for a certain product is said to be inelastic, it means:

  • A small increase in price will lead to a big drop in the amount demanded
  • Large changes in price have only a small effect on demand (correct)
  • Consumers are rather insensitive to price changes (correct)
  • A small increase in price will lead to a small rise in the amount demanded

    • What are the most important factors affecting the elasticity of demand for a product?

    Availability of substitutes, necessity vs. luxury, and time period

    Which will be more elastic: the demand for Cadbury's Fruit 'n Nut or the demand for chocolate generally?

    The demand for Cadbury's Fruit 'n Nut is more elastic.

    Why is the demand for fruit juice more elastic than that for milk? and how do you explain the difference between the elasticity of demand for chicken and that for other poultry?

    <p>Fruit juice has more substitutes making consumers more responsive to price changes.</p> <p>Chicken has fewer substitutes within its category, especially among commonly consumed meats, so its demand is inelastic.</p> Signup and view all the answers

    What is the price elasticity of demand (PED) facing the filling station if sales rise to 12,000 litres per day after a price decrease from 140p to 133p?

    <p>The PED is -4, indicating that demand is elastic.</p> Signup and view all the answers

    What is meant by an 'inferior good' in economics?

    <p>A good where demand decreases as income rises.</p> Signup and view all the answers

    Which of the following goods are considered inferior?

    <p>Standard white loaves</p> Signup and view all the answers

    If the good in question has a negative income elasticity of demand, it is termed inferior.

    <p>True</p> Signup and view all the answers

    What does a negative income elasticity imply about certain goods?

    <p>These goods are inferior goods—demand decreases as income rises.</p> Signup and view all the answers

    Why do shops have January sales?

    <p>Demand is more elastic in January as consumers are more price-sensitive after the holiday season.</p> Signup and view all the answers

    A tax on petrol will not have much effect on consumption because demand is inelastic.

    <p>True</p> Signup and view all the answers

    State the cross-price elasticity of demand (XED) between petrol and motor vehicles.

    <p>Negative</p> Signup and view all the answers

    If the price of black grapes falls by 8%, the demand for white grapes will _______.

    <p>decrease by 16%</p> Signup and view all the answers

    Calculate the coefficient for the elasticity of supply given the output and price data over ten years.

    <p>PES is 2, indicating elastic supply.</p> Signup and view all the answers

    Which of the following statements is TRUE based on the income elasticity data provided?

    <p>Some of the listed foods are considered inferior goods.</p> Signup and view all the answers

    Sales of natural gas have increased despite a price rise. Which of the following best explains this situation?

    <p>The increase in demand is due to factors other than price, such as increased need or limited substitutes.</p> Signup and view all the answers

    Demand for white grapes decreases by 16% when black grapes become cheaper.

    <p>True</p> Signup and view all the answers

    The elasticity of supply is defined as the percentage increase in price divided by the percentage increase in quantity supplied.

    <p>False</p> Signup and view all the answers

    The percentage increase in output is greater than the percentage increase in price when analyzing elasticity.

    <p>True</p> Signup and view all the answers

    A price elasticity of supply (PES) of 2 indicates inelastic supply.

    <p>False</p> Signup and view all the answers

    It is easier for farmers to switch crops than for industries to switch manufactured products, leading to an expectation of elastic supply in agriculture.

    <p>True</p> Signup and view all the answers

    A tax on petrol will have a significant effect on consumption due to demand being inelastic.

    <p>False</p> Signup and view all the answers

    An increase in income by 10% will result in a decrease in petrol demand.

    <p>False</p> Signup and view all the answers

    Margarine and butter are considered substitute goods with positive cross-price elasticity of demand.

    <p>True</p> Signup and view all the answers

    Coffee and cocoa are complementary goods with negative cross-price elasticity of demand.

    <p>False</p> Signup and view all the answers

    The demand for petrol will decrease when the price of motor vehicles rises.

    <p>False</p> Signup and view all the answers

    The demand for white grapes will increase if the price of black grapes falls due to a positive cross-price elasticity of +2.

    <p>True</p> Signup and view all the answers

    Motorcyclists are not likely to need helmets, suggesting a zero cross-price elasticity between motorcycles and motorcycle helmets.

    <p>False</p> Signup and view all the answers

    Holidays in Ireland and Scotland are considered complementary goods.

    <p>False</p> Signup and view all the answers

    Match the elasticity type with the corresponding characteristic:

    <p>Price elasticity of demand = Measures the responsiveness of quantity demanded to a change in price Income elasticity of demand = Measures the responsiveness of quantity demanded to a change in income Cross-price elasticity of demand = Measures the responsiveness of quantity demanded of one good to a change in price of another good Inelastic demand = A situation where percentage change in quantity demanded is less than percentage change in price</p> Signup and view all the answers

    Match the goods with their expected cross-price elasticity of demand:

    <p>Margarine and butter = Positive XED Petrol and motor vehicles = Negative XED Coffee and cocoa = Positive XED Motorcycles and motorcycle helmets = Negative XED</p> Signup and view all the answers

    Match the scenario with the expected outcome of quantity demanded:

    <p>Price of black grapes falls by 8% = Demand for white grapes increases by 16% Income increases by 10% = Demand for petrol increases by more than 10% Tax on petrol is introduced = Consumption is minimally affected Quality of public transport improves = Demand for petrol may decrease</p> Signup and view all the answers

    Match the type of elasticity with its implication:

    <p>Inelastic demand = Higher revenue from price increases Positive income elasticity = Demand increases with rising income Negative cross-price elasticity = Demand for one good decreases as price of another increases Substitutes = Positive cross-price elasticity of demand</p> Signup and view all the answers

    Match the goods with their relationships:

    <p>CD players and CDs = Complements Coal and gas = Substitutes Holidays in Ireland and Scotland = Substitutes Motorcycles and motorcycle helmets = Complements</p> Signup and view all the answers

    Study Notes

    Price Elasticity of Demand

    • Inelastic demand means consumers are not sensitive to price changes.
    • Small price changes lead to small quantity changes for products with inelastic demand.
    • Most important factors affecting elasticity:
      • Availability of substitutes: More substitutes mean more elastic demand.
      • Necessity vs. luxury: Necessities are usually inelastic, luxuries are more elastic.
      • Time period: Demand is more elastic over longer time periods as consumers have time to find alternatives.
    • For Cadbury’s Fruit 'n Nut demand is more elastic than overall demand for chocolate because it has more substitutes.
    • Milk is inelastic due to limited substitutes, while fruit juice is more elastic with more alternatives.
    • Chicken demand is relatively inelastic because it has fewer substitutes, while other poultry is more elastic due to more substitutes.
    • Example calculation: Price elasticity of demand = percentage change in quantity / percentage change in price
    • Invalidity reasons for price elasticity calculations:
      • Time of price change: Demand may be inflated due to a specific time period (e.g., Friday for weekend trips).
      • Income effect: People might receive paychecks, leading to increased spending regardless of the price change.

    Income Elasticity of Demand

    • Inferior goods are products where demand decreases as income rises.
    • Examples of likely inferior goods: standard white loaves, remould tyres, Tesco’s baked beans, McDonald’s hamburgers.
    • Examples of likely normal goods: croissants, Earl Grey tea, coffee, rice, package holidays to Spain.
    • Negative income elasticity indicates an inferior good.
    • Examples of negative income elasticity goods: margarine, standard white bread.
    • Other foods with negative income elasticity: milk, potatoes, sugar, preserves, bread, tea.

    Price and Income Elasticity

    • Upward sloping demand curve does not necessarily indicate an increase in price.
    • Increased demand can be driven by external factors such as weather or reduced availability of substitutes.
    • January sales are held because demand is more elastic after the holiday season, encouraging consumers to buy due to recent holiday spending.
    • Petrol demand:
      • Tax on petrol will not have a significant impact on consumption because of its inelasticity.
      • However, a tax on petrol will raise revenue due to its inelasticity.
      • A 10% rise in incomes will lead to a greater than 10% increase in petrol purchase.
      • Public transport availability and cycling infrastructure influence petrol demand elasticity.

    Cross-price Elasticity of Demand

    • Positive cross-price elasticity indicates substitute goods.
    • Negative cross-price elasticity indicates complementary goods.
    • Example of substitutes: margarine and butter, coffee and cocoa, coal and gas, holidays in Ireland and holidays in Scotland.
    • Example of complements: petrol and motor vehicles, motorcycles and helmets, CD players and CDs.
    • If the price of black grapes falls by 8%, demand for white grapes will decrease by 16% (assuming cross-price elasticity of demand for white grapes with respect to black grapes is +2).

    Elasticity of Supply

    • Elasticity of supply = percentage increase in quantity supplied / percentage increase in price
    • Example calculation: PES= 2, indicating elastic supply.
    • Elastic supply means producers can quickly respond to price changes.
    • Supply is often elastic for agricultural commodities: Farmers can switch between crops more easily than industries can switch manufactured products.

    Elasticity of Demand

    • Petrol Demand:
      • Price inelastic demand: Increase in price not significantly reduce consumption, but will generate revenue
      • Positive income elasticity, so as income rises, so does petrol demand
      • Availability and quality of alternative transport influences demand elasticity

    Cross-Price Elasticity of Demand

    • Substitute Goods:

      • Defined as a positive Cross-Price Elasticity of Demand (XED)
      • Increase in price of one good leads to an increase in demand for the other good

    • Complementary Goods:

      • Defined as a negative XED
      • Increase in price of one good leads to a decrease in demand for the other good

    • Examples of XED:

      • Margarine and butter: Substitutes (positive XED)
      • Petrol and motor vehicles: Complements (negative XED)
      • Coffee and cocoa: Substitutes (positive XED)
      • Motorcycles and helmets: Complements (negative XED)
      • CD players and CDs: Complements (negative XED)
      • Coal and gas: Substitutes (positive XED)
      • Holidays in Ireland and holidays in Scotland: Substitutes (positive XED)

    Elasticity of Supply

    • Definition:
      • Measures the percentage change in quantity supplied divided by the percentage change in price.
    • Calculating Elasticity of Supply (PES):
      • PES = (%∆Q/%∆P)
    • Agricultural Commodity Example:
      • 1980 Output: 100, Price: £16/tonne
      • 1990 Output: 300, Price: £32/tonne
      • PES = 2, indicating elastic supply
    • Factors Influencing Supply Elasticity:
      • Ease of shifting production from one good to another

    Price Elasticity of Demand

    • A tax on petrol will likely have a small impact on consumption due to its inelastic demand, meaning price changes have a minor effect on quantity demanded.
    • Taxing petrol will generate substantial revenue due to its inelastic demand.
    • A 10% increase in income will result in a greater than 10% increase in petrol consumption due to its positive income elasticity (meaning consumption rises as income rises).
    • Factors like public transport availability, quality, and the presence of cycleways influence the elasticity of demand for petrol.

    Cross-Price Elasticity of Demand

    • Substitutes: Goods with a positive cross-price elasticity of demand (XED). When the price of one good increases, demand for the other increases.
      • Examples: Margarine and butter, coffee and cocoa, coal and gas, holidays in Ireland and holidays in Scotland.
    • Complements: Goods with a negative XED. When the price of one good increases, demand for the other decreases.
      • Examples: Petrol and motor vehicles, motorcycles and helmets, CD players and CDs.

    Elasticity of Supply

    • Percentage change in quantity supplied divided by percentage change in price.
    • Elastic supply: Quantity supplied changes more than proportionally to price changes.
    • Inelastic supply: Quantity supplied changes less than proportionally to price changes.
    • In the given example, the elasticity of supply for the agricultural commodity is 2, indicating an elastic supply. This means farmers can quickly adjust their production in response to price changes.
    • Supply is often more elastic in agriculture than in manufacturing due to the easier switching of crops.

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    Description

    Test your knowledge on the concepts of price elasticity of demand through this quiz. Explore factors that influence elasticity, the distinction between inelastic and elastic demand, and real-world examples. Perfect for economics students looking to deepen their understanding of consumer behavior.

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