Economics Chapter 5 PDF

Chapter 5 1...The elasticity of demand and the elasticity supply or describe all the possible elasticity found in demand and supply. Ans: Elasticity measures how much the quantity demanded or supplied of a good changes in response to changes in price or other factors. Below are the types of elastici...

Chapter 5 1...The elasticity of demand and the elasticity supply or describe all the possible elasticity found in demand and supply. Ans: Elasticity measures how much the quantity demanded or supplied of a good changes in response to changes in price or other factors. Below are the types of elasticity for demand and supply, along with examples and graphs for each case. Demand Elasticity 1)Price Elasticity of Demand: Elastic: PED > 1 (e.g., luxury goods) Inelastic: PED < 1 (e.g., necessities) Unitary Elastic: PED = 1 (e.g., certain consumer goods) 2)Cross Price Elasticity of Demand: Substitutes: Positive XED (e.g., tea and coffee) Complements: Negative XED (e.g., printers and ink) 3)Income Elasticity of Demand: Normal Goods: YED > 0 (e.g., organic food) Inferior Goods: YED < 0 (e.g., instant noodles) Supply Elasticity : 1))Price Elasticity of Supply (PES): Elastic: PES > 1 (e.g., T-shirts) Inelastic: PES < 1 (e.g., agricultural products) Unitary Elastic: PES = 1 (e.g., certain services) 2))Cross Price Elasticity of Supply: Substitutes: Positive XED (e.g., corn and soybeans) Complements: Negative XED (e.g., beef and leather) 3))Income Elasticity of Supply: Normal Goods: Positive YED (e.g., organic vegetables) Inferior Goods: Negative YED (e.g., low-cost products) 2....Explain the variations in price elasticity of demand using appropriate graphs. Ans: Price elasticity of demand (PED) measures how responsive the quantity demanded of a good is to a change in its price. The variations in price elasticity can be classified into five main categories: perfectly elastic, elastic, unitary elastic, inelastic, and perfectly inelastic. Below is an explanation of each type, accompanied by appropriate graphs. ( ( Figure 1)) 1. Perfectly Elastic Demand Definition: Quantity demanded changes infinitely with any change in price. Graph: A horizontal line. Example: Perfect substitutes in a competitive market. 2. Elastic Demand Definition: Quantity demanded changes significantly with a small change in price (PED > 1). Graph: A relatively flat downward sloping curve. Example: Luxury goods, where consumers can easily forego purchases. 3. Unitary Elastic Demand Definition: Quantity demanded changes proportionately with price changes (PED = 1). Graph: A downward sloping curve that maintains a constant ratio between price and quantity. Example: A good for which a 10% increase in price leads to a 10% decrease in quantity demanded. 4. Inelastic Demand Definition: Quantity demanded changes little with a significant change in price (PED < 1). Graph: A steep downward sloping curve. Example: Necessities like salt or medicine, where consumers will still buy regardless of price increases. 5. Perfectly Inelastic Demand Definition: Quantity demanded remains constant regardless of price changes (PED = 0). Graph: A vertical line. Example: Life-saving drugs, where demand does not change with price. 3..define price elasticity of demand and the income elasticity of demand Ans: ### Price Elasticity of Demand (PED) **Definition**: Measures how responsive the quantity demanded of a good is to a change in its price. **Formula**: (Write down 89 page rules) **Interpretation**: - **Elastic Demand (PED > 1)**: Large change in quantity demanded due to small price change. - **Inelastic Demand (PED < 1)**: Small change in quantity demanded due to large price change. - **Unitary Elastic (PED = 1)**: Proportional change in quantity demanded with price change. --- ### Income Elasticity of Demand (YED) **Definition**: Measures how responsive the quantity demanded of a good is to a change in consumer income. **Formula**: (write down 96 page rules) **Interpretation**: - **Normal Goods (YED > 0)**: Demand increases with income. - **Inferior Goods (YED < 0)**: Demand decreases with income. - **Unitary Income Elastic (YED = 1)**: Proportional change in quantity demanded with income change. 4...Demonstrate the influential elements that impact elasticity of demand. Ans: ### Key Points Affecting Elasticity of Demand 1. **Availability of Substitutes**: More substitutes = more elastic demand. Consumers can switch easily to alternatives if prices rise. 2. **Proportion of Income**: Goods taking a large portion of income = more elastic demand, as people are sensitive to price changes. 3. **Necessity vs. Luxury**: Necessities have inelastic demand, while luxuries are more elastic since people can avoid them. 4. **Time Period**: Short term = inelastic; Long term = more elastic as consumers adjust over time. 5. **Brand Loyalty**: Strong loyalty = inelastic demand since loyal consumers will continue purchasing even at higher prices. 6. **Consumer Preferences**: Changing tastes affect demand elasticity, making it more elastic if preferences shift. 7. **Market Definition**: Narrow market = more elastic; broad market = less elastic as fewer alternatives exist. 5...Analyze the possible methods for calculating price elasticity of demand to select the right one Ans:Here’s a simpler explanation of the three methods for calculating price elasticity of demand (PED) and when to use each: ### 1. **Percentage Change Method** - **How it works**: Calculate the percentage change in quantity demanded and price, then divide them. - **Formula**: - **When to use**: If you're making quick, simple calculations for small price changes. - **Limitation**: It can be less accurate for big price changes. ### 2. **Midpoint (Arc Elasticity) Method** - **How it works**: Use the average of the starting and ending price and quantity to calculate the percentage changes. - **Formula**: - **When to use**: If prices or quantities change a lot and you want a more accurate result. - **Limitation**: Slightly more complex, but it gives better accuracy. ### 3. **Point Elasticity Method** - **How it works**: Measures elasticity at a specific point on the demand curve using advanced math (calculus). - **Formula**: - **When to use**: If you have detailed information about the demand curve and need precise results. - **Limitation**: It's harder to calculate and not ideal for quick, everyday use. ### Summary - Use **Percentage Change** for simple and quick calculations. - Choose **Midpoint Method** for better accuracy with larger changes. - Use **Point Elasticity** when you need high precision and have demand curve data. For most cases, the **Midpoint Method** is the best balance between simplicity and accuracy. 6...Examine the relationship between price elasticity and revenue from demand perspective. Ans: The relationship between total revenue and price elasticity of demand (PED) is crucial in determining how changes in price affect a business's revenue. Let's break this down with a simple explanation, followed by a graph to illustrate the concept. Key Concepts: Total Revenue (TR): Total revenue is calculated by multiplying the price (P) by the quantity demanded (Q). TR=P×Q Price Elasticity of Demand (PED): Price elasticity measures how much the quantity demanded changes in response to a change in price. ((( Add figure 2 and explanation))) 7....If elasticity is greater than one, is demand elastic or inelastic? If the elasticity equals zero, is demand perfectly elastic or perfectly inelastic. Ans:Here’s a simplified explanation: 1. **Elastic Demand (PED > 1)**: - **Definition**: Demand is elastic when the elasticity is greater than 1. - **Meaning**: Consumers are very sensitive to price changes. A small price change leads to a big change in how much they buy. - **Example**: If the price of a luxury car goes up, many people will buy fewer cars. (( Add figure 1 (d) graph)) 2. **Perfectly Inelastic Demand (PED = 0)**: - **Definition**: Demand is perfectly inelastic when elasticity is zero. - **Meaning**: Consumers do not change their buying habits at all when prices change. - **Example**: If the price of life-saving medicine increases, people will still buy the same amount because they need it. (((Add figure 1 (a) graph))) In short, elastic demand means big changes in buying behavior with price changes, while perfectly inelastic demand means no change at all. 8.....If demand is elastic, how will an increase in price change total revenue Ans:If demand is elastic (PED > 1), an increase in price will lead to a decrease in total revenue. Here’s how it works: 1. **Consumer Sensitivity**: When demand is elastic, consumers are sensitive to price changes. A rise in price will cause a significant drop in the quantity demanded. 2. **Total Revenue Calculation**: Total revenue (TR) is calculated as: TR=Price×Quantity Demand 3. **Impact of Price Increase**: - **Price Increases**: If the price goes up, the higher price does not compensate for the large decrease in quantity demanded. Therefore, total revenue decreases. - **Example**: If a company raises the price of a product, say from $10 to $12, but the quantity demanded drops significantly (for instance, from 100 units to 60 units), total revenue would drop: - Before: $10 × 100 = $1,000 - After: $12 × 60 = $720 ### Summary: - **Elastic Demand**: When prices rise, total revenue falls because the loss in quantity sold outweighs the gain from the higher price. (( Add figure 3( b))) 9...Evaluate the determinants that influences the elasticity of supply. Ans:Determinants of Elasticity of Supply: Key Points 1. **Time Period**: - **Short Run**: Generally inelastic; slow adjustments to production. - **Long Run**: More elastic; firms can fully adjust production. 2. **Availability of Inputs**: - Readily available inputs lead to more elastic supply. - Scarce inputs result in inelastic supply. 3. **Mobility of Factors of Production**: - High mobility allows for elastic supply; resources can be reallocated easily. - Low mobility leads to inelastic supply; specialized resources can't shift easily. 4. **Production Time**: - Long production times result in inelastic supply. - Short production times allow for more elastic supply. 5. **Nature of the Good**: - Durable goods usually have elastic supply. - Perishable goods typically exhibit inelastic supply. 6. **Market Structure**: - Competitive markets tend to have more elastic supply. - Monopolistic markets often show inelastic supply. 10..How is the price elasticity calculated? explain what is measures. Ans:### Price Elasticity of Demand (PED) Calculation **Formula**: ### Steps to Calculate: 1. **Change in Quantity Demanded**: New Quantity - Old Quantity. 2. **Percentage Change in Quantity**: ( 3. **Change in Price**: New Price - Old Price. 4. **Percentage Change in Price:  5. **Calculate PED**: Substitute the percentage changes into the formula. ### What It Measures: - **Sensitivity of Demand**: PED measures how responsive quantity demanded is to price changes. - **PED > 1**: Elastic demand (sensitive to price changes). - **PED < 1**: Inelastic demand (less sensitive to price changes). - **PED = 1**: Unitary elastic (equal percentage changes in price and quantity). 11....Explain the variations in price elasticity of supply using appropriate graphs. Ans: Variations in Price Elasticity of Supply (PES) ((((((( Figure 5))) **1. Perfectly Inelastic Supply (PES = 0)** - **Description**: Quantity supplied doesn't change with price. - **Graph**: Vertical line. - **Example**: Rare artworks. **2. Inelastic Supply (0 < PES < 1)** - **Description**: Quantity supplied changes less than price. - **Graph**: Steep upward slope. - **Example**: Agricultural products. **3. Unitary Elastic Supply (PES = 1)** - **Description**: Quantity supplied changes exactly with price. - **Graph**: Diagonal line. - **Example**: Some manufactured goods. **4. Elastic Supply (PES > 1)** - **Description**: Quantity supplied changes more than price. - **Graph**: Flatter upward slope. - **Example**: Consumer electronics. **5. Perfectly Elastic Supply (PES = ∞)** - **Description**: Any price increase leads to infinite quantity supplied. - **Graph**: Horizontal line. - **Example**: Commodities in perfect competition. ### Summary - **Perfectly Inelastic**: No change (vertical). - **Inelastic**: Small change (steep). - **Unitary Elastic**: Equal change (diagonal). - **Elastic**: Big change (flat) **Perfectly Elastic**: Infinite change (horizontal). 12 : Calculate the elasticity of supply.