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

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

    Substitutes, luxuries or necessities, time

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

    Cadbury’s Fruit’n Nut, it has more substitutes

    Why is the demand for fruit juice more elastic than that for milk?

    <p>Fruit juices have more substitutes</p> Signup and view all the answers

    Explain the difference between the elasticity of demand for chicken and that for other poultry.

    <p>Chicken does not have any close substitutes</p> Signup and view all the answers

    What is the price elasticity of demand calculated for the filling station?

    <p>PED = -4</p> Signup and view all the answers

    List two reasons why the estimate of price elasticity of demand may not be valid.

    <p>People get paid on Friday; they might need petrol for the weekend.</p> Signup and view all the answers

    What does 'inferior good' mean in economics?

    <p>A good for which demand decreases as income increases</p> Signup and view all the answers

    Choose the two correct statements about inferior goods:

    <p>If your income goes up you will buy less of the good in question.</p> Signup and view all the answers

    What does it imply if some estimates of income elasticity are negative?

    <p>It indicates that the goods in question are inferior.</p> Signup and view all the answers

    Does the rise in sales of natural gas despite a price increase mean that the demand curve for natural gas is upward sloping?

    <p>No, it could be explained by other factors such as necessity or lack of substitutes.</p> Signup and view all the answers

    Why do shops have January sales?

    <p>Demand in January is more elastic.</p> Signup and view all the answers

    A tax on petrol will not have much effect on consumption.

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

    A tax on petrol will raise lots of revenue because demand is inelastic.

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

    A rise in incomes of 10% will lead to an increase in the amount of petrol bought of more than 10 percent.

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

    The price and quality of public transport will affect the elasticity of demand for petrol.

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

    State whether the cross-price elasticity of demand between margarine and butter is positive, negative, or zero.

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

    What will happen to the demand for white grapes if the price of black grapes falls by 8%?

    <p>It will increase by 16%</p> Signup and view all the answers

    Calculate the coefficient for the elasticity of supply based on the output and price change.

    <p>PES = +2</p> Signup and view all the answers

    The supply of this commodity seems to be inelastic.

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

    The percentage increase in output is more than the percentage increase in price. Therefore, supply is said to be elastic.

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

    We would expect supply to be elastic since it is easier for farmers to switch crops compared to industry.

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

    Study Notes

    Price Elasticity of Demand

    • If demand for a product is inelastic, consumers are insensitive to price changes, large changes in price have only a small effect on demand.
    • Factors affecting elasticity of demand: Substitutes, luxuries or necessities, time
    • Cadbury's Fruit 'n Nut will be more elastic than the demand for chocolate generally, because it has more substitutes.
    • Demand for fruit juice is more elastic than milk because it has more substitutes, whereas milk is a necessity.
    • Demand for chicken is less elastic than other poultry because it has no close substitutes.
    • The price elasticity of demand facing a petrol station is -4, this can be calculated as (12000-10000)/10000 x 100 = +20% and (133-140)/140 x 100 = -5% and PED = %∆Q/%∆P so 20/-5 = -4
      • This estimate may not be valid because:
      • People get paid on Friday
      • They may need fuel for the weekend

    Income Elasticity of demand

    • An inferior good is a good where demand decreases as income increases.
    • Examples of inferior goods:
      • Standard white loaves, remould tyres, Tesco's baked beans
    • Examples of normal goods
      • Croissants, Earl Grey tea, McDonald's hamburgers, coffee, rice, package holidays to Spain.
    • An inferior good has a a negative income elasticity of demand.
    • Negative income elasticity shown in the table for milk, margarine, potatoes, sugar, bread and tea, implies that these foods are inferior goods, meaning people buy less of them as they earn more.

    Price and Income elasticity – one or the other or both

    • Rising sales of natural gas despite an increase in price does not mean the demand curve is upward sloping.
      • Could be explained by:
      • Increase in demand due to other reasons
      • An increase in price may be accompanied by an even larger increase in income.
    • Shops have January sales because demand in January is more elastic.
    • Price elasticity of demand for petrol is -0.1 and the income elasticity is +1.2, meaning:
      • A tax on petrol will not have much effect on consumption (true)
      • A tax on petrol will raise lots of revenue because demand is inelastic (true)
      • A rise in incomes of 10% will lead to an increase in the amount of petrol bought of more than 10 percent (true)
      • The price and quality of public transport, and the presence or absence of cycleways, will affect the elasticity of demand for petrol (true)

    Cross-price elasticity of demand

    • Cross-price elasticity of demand measures the responsiveness of demand for one good to changes in the price of another good.
    • It is positive for substitutes and negative for complements.
      • Examples:
      • White grapes, black grapes - positive
      • Petrol, motor vehicles - negative
      • Coffee, cocoa - positive
      • Motor cycles and motor cycle helmets - negative
      • CD players and CDs - negative
      • Coal and gas - positive
      • Holidays in Ireland and holidays in Scotland - positive
    • If cross-price elasticity of demand for white grapes with respect to black grapes is +2 and the price of black grapes falls by 8% then the demand for white grapes will decrease by 16% (8 x 2).

    Elasticity of Supply

    • The elasticity of supply is defined as: % change in quantity supplied / % change in price.
    • Based on the provided data, the coefficient for the elasticity of supply is 2.
    • The percentage change in output is 200%, the percentage change in price is 100%
    • The following statements about the supply of this commodity are true:
    • The supply of this commodity seems to be elastic (true)
    • The percentage increase in output is more than the percentage increase in price (true)
    • We would expect supply to be elastic since it is easier for farmers to switch from growing one crop to another than it is for industry to switch from producing one manufactured product to another (true)

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    Related Documents

    Elasticity - Seminar Guide (PDF)

    Description

    Test your knowledge on price elasticity of demand and its influencing factors. Understand the distinction between elastic and inelastic demand and how substitutes affect consumer behavior. Explore real-world applications and calculations involving price elasticity.

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