Chapter -3(B) Elasticity of Demand
Sr. No. | Name of Chapter |
Q. 1. Complete the following statements :
1) Price elasticity of demand on a linear demand curve at the X axis is ...............
a) zero
b) one
c) infinity
d) less than one
Ans: a) zero
2) Price elasticity of demand on a linear demand curve at the Y-axis is equal to .................
a) zero
b) one
c) infinity
d) greater than one
Ans: c) infinity
3) Demand curve is parallel to X axis, in case of ................
a) perfectly elastic demand
b) perfectly inelastic demand
c) relatively elastic demand
d) relatively inelastic demand
Ans: c) relatively elastic demand
4) When percentage change in quantity demanded is more than the percentage change in price, the demand curve is ................
a) flatter
b) steeper
c) rectangular
d) horizontal
Ans : a) flatter
5) Ed = 0 in case of ................
a) luxuries
b) normal goods
c) necessities
d) comforts
Ans: c) necessities
Q. 2. Give economic terms :
1) Degree of responsiveness of quantity demanded to change in income only.
Ans: Income Elasticity of demand
2) Degree of responsiveness of a change in quantity demanded of one commodity due to change in the price of another commodity.
Ans: Cross Elasticity of demand
3) Degree of responsiveness of a change of quantity demanded of a good to a change in its price.
Ans: Price Elasticity of demand
4) Elasticity resulting from infinite change in quantity demanded.
Ans: Perfectly Elasticity
5) Elasticity resulting from a proportionate change in quantity demanded due to a proportionate change in price.
Ans: Unitary elasticity
Q. 3. Complete the correlation :
1) Perfectly elastic demand : Ed = ∞ ::_____ : Ed= 0
Ans: Perfectly Inelastic demand
2) Rectangular hyperbola : ______ : Steeper demand curve : Relatively inelastic demand.
Ans: Unitary elasticity demand
3) Straight line demand curve : Linear demand curve :: _____ : non linear demand curve.
Ans: Curved Line demand Curve
4) Pen and ink : ______ :: Tea and Coffee: Substitutes.
Ans: Complementary goods
5) Ratio method : Ed = % Q / % P :: ________ : Ed = Lower segment / Upper segment
Ans: Geometrical Method
Q. 4. Assertion and Reasoning type questions :
1) Assertion (A) : Elasticity of demand explains that one variable is influenced by another variable.
Reasoning (R) : The concept of elasticity of demand indicates the effect of price and changes in other factors on demand.
Options : 1) (A) is True, but (R) is False
2) (A) is False, but (R) is True
3) Both (A) and (R) are True and (R) is the correct explanation of (A)
4) Both (A) and (R) are True and (R) is not the correct explanation of (A)
Ans: 3) Both (A) and (R) are True and (R) is the correct explanation of (A)
2) Assertion (A) : A change in quantity demanded of one commodity due to a change in the price of other commodity is cross elasticity.
Reasoning (R) : Changes in consumers income leads to a change in the quantity demanded.
Options : 1) (A) is True, but (R) is False
2) (A) is False, but (R) is True
3) Both (A) and (R) are True and (R) is the correct explanation of (A)
4) Both (A) and (R) are True and (R) is not the correct explanation of (A)
Ans: 4) Both (A) and (R) are True and (R) is not the correct explanation of (A)
3) Assertion (A) : Degree of price elasticity is less than one in case of relatively inelastic demand.
Reasoning (R) : Change in demand is less then the change in price.
Options : 1) (A) is True, but (R) is False
2) (A) is False, but (R) is True
3) Both (A) and (R) are True and (R) is the correct explanation of (A)
4) Both (A) and (R) are True and (R) is not the correct explanation of (A)
Ans: 3) Both (A) and (R) are True and (R) is the correct explanation of (A)
Q. 5. Distinguish between :
1) Relatively elastic and Relatively inelastic demand.
Answer:
|
Relatively
Elastic |
Relatively
Inelastic |
|
When a percentage change in price leads
to more than proportionate change in quantity demanded, the demand is said to
be relatively elastic |
When a percentage change in price leads
to less than proportionate change in the quantity demanded, demand is said to
be relatively inelastic. |
|
The
value of ED > 1 |
The
value of ED < 1 |
|
It
is represented symbolics Ed = % ∆Q / % ∆ P > 1 |
It is represented symbolics Ed
= % ∆Q / % ∆ P < 1 |
|
The
slope of demand curve is flatter. |
The
slope of demand curve is steeper. |
 |
 |
|
Generally, Luxury goods have relatively elastic demand. |
Generally, necessary goods have relatively inelastic
demand. |
2) Perfectly elastic demand and Perfectly inelastic demand.
Answer:
|
Perfectly elastic demand |
Perfectly inelastic demand |
|
When the change
in price brings about infinite change in quantity demanded is known as
perfectly elastic demand. |
When demand does not give any response
to the change in price is known as perfectly inelastic demand. |
|
Numerical co-efficient
of such a demand is infinity. |
Numerical
co-efficient of such a demand is zero. |
|
E.g. such
elasticity of demand is only a theoretical possible. |
E.g. salt has
much demand. |
Q. 6. Answer the following questions :
1) Explain the factors influencing elasticity of demand.
Ans:
Factors influencing the elasticity of demand :
Elasticity of demand depends upon several factors which are discussed below :
1) Nature of commodity :
By nature we can classify commodities as necessaries, comforts and luxury goods. Demand for necessaries like foodgrains, medicines, textbooks etc. is relatively inelastic and for comforts and luxury goods like cars, perfumes, furniture etc. demand is relatively elastic.
2) Availability of substitutes :
Demand for a commodity will be more elastic, if its close substitutes are available in the market. For example, lemon juice, sugarcane juice etc. But commodities having no close substitutes like salt the demand will be inelastic.
3) Number of uses :
Single use goods have a less elastic demand. Multi-use goods have more elastic demand, For example, coal, electricity etc.
4) Habits :
Habits make demand for certain goods relatively inelastic. For example, addicted goods, drugs etc.
5) Durability :
The demand for durable goods is relatively elastic. For example, furniture, washing machine etc. Demand for perishable goods is inelastic. For example, milk, vegetables etc.
6) Complementary goods :
The demand for a commodity which is used in conjunction with other commodities to satisfy a single
want is relatively inelastic. For example, a fall in the price of mobile handsets may lead to rise in the demand for sim cards.
7) Income of the consumer :
Demand for goods is usually inelastic, if the consumer has high income. The demand pattern of a very rich and an extremely poor person is rarely affected by significant changes in the price.
8) Urgency of needs :
Goods which are urgently needed will have relatively inelastic demand. For example, medicines. Luxury goods which are less urgent have relatively elastic demand.
9) Time period :
Elasticity of demand is always related to period of time. It varies with the length of time period. Generally speaking, longer the duration of period greater will be the elasticity of demand and vice-versa. This is because a consumer can change the consumption habits in the long run in favour of cheaper substitutes of the commodities
2) Explain the total outlay method of measuring elasticity of demand?
Ans: Total Expenditure Method :
This method was developed by Prof. Marshall. In this method, total amount of expenditure before and after the price change is compared.
Here the total expenditure refers to the product of price and quantity demanded.
Total expenditure = Price × Quantity demanded
In this connection, Marshall has given the following propositions :
A) Relatively elastic demand (Ed >1) :
When with a given change in the price of a commodity total outlay increases, elasticity of demand is greater than one.
B) Unitary elastic demand (Ed = 1) :
When price falls or rises, total outlay does not change or remains constant, elasticity of demand is equal to one.
C) Relatively inelastic demand (Ed <1) :
When with a given change in price of a commodity total outlay decreases, elasticity of demand is less than one. This can be explained with the help of the following example.
Total outlay method
|
Commodity |
Price
(Rs.) |
Demand
(per day in units) |
Total
Outlay (Rs.) |
Electricity
of Demand |
|
‘A’ |
10 |
6 |
60 |
Ed < 1 (Relatively inelastic) |
|
20 |
5 |
100 |
||
|
‘B’ |
30 |
4 |
120 |
Ed = 1 (Unitary Elastic) |
|
40 |
3 |
120 |
||
|
‘C’ |
50 |
2 |
100 |
Ed > 1 (Relatively elastic) |
|
60 |
1 |
60 |
‘A’ original price is Rs. 10 per unit and quantity demanded is 6 units.
Therefore, total expenditure incurred is Rs. 60. When price rises to ` 20 quantity demanded falls
to 5 units, the total expenditure incurred is ` 100.
In this case, total outlay is greater than original expenditure. Hence, in this example elasticity
of demand is greater than one. (Ed >1) that is relatively elastic demand.
In example ‘B’, original price is ` 30 per unit and quantity demanded is 4 units. Therefore total expenditure is ` 120. When price rises to ` 40 quantity demanded falls to ‘3’ units. Total
expenditure incurred is ` 120. In this case total outlay is same (equal) to original expenditure.
Hence, in this example, elasticity of demand is equal to one (Ed = 1) that is unitary elastic demand.
In example ‘C’, original price is ` 50 per unit and quantity demanded is 2 units. Therefore total expenditure is ` 100. When price rises to ` 60, quantity demand falls to 1 unit and total expenditure incurred is ` 60. In this case total outlay is less than original expenditure.
Hence, elasticity of demand is less than one (Ed <1) that is relatively inelastic demand.
3) Explain importance of elasticity of demand.
Ans: Importance of Elasticity of Demand :
The concept of elasticity of demand is of great importance to producers, farmers, workers and the Government. Lord Keynes considered this concept to be the most important contribution of Alfred Marshall. Significance of the concept becomes clear from the following applications :
1) Importance to a Producer :
Every producer has to decide the price of his product at which he has to sell it. For this purpose, elasticity of demand becomes important. If the demand for a product is relatively inelastic, he will fix up a higher price and vice-versa. The concept of elasticity of demand is also useful to a monopolist to practice price discrimination.
2) Importance to Government :
Taxation policy of the Government is based on the concept of elasticity of demand. Those commodities whose demand is relatively inelastic will be taxed more because it will not affect their demand much and vice-versa.
3) Important in Factor Pricing :
The concept of elasticity of demand is useful in determination of factor prices. The factor of production for which demand is relatively inelastic can command a higher price as compared to those having elastic demand. For example, workers can ask for higher wages, if the demand for the product produced by them is relatively inelastic.
4) Importance in Foreign Trade :
The concept of elasticity of demand is useful to determine terms and conditions in foreign trade. The countries exporting commodities for which demand is relatively inelastic can raise their prices. For example, Organization of Petroleum Exporting Countries (OPEC) have increased the price of oil several times. The concept is also useful in formulating export and import policy of a country.
5) Public Utilities :
In case of public utilities like railways which have an inelastic demand, Government can either subsidise or nationalise them to avoid consumers exploitation.
6) Proportion of expenditure :
If the proportion of expenditure in a person's income is small, then demand for the product is relatively inelastic. For example, news papers. If the proportion of expenditure is large, then demand for the product is relatively elastic.
Q. 7. Observe the following figure and answer the questions :
1) Identify and define the degrees of elasticity of demand from the following demand curves.
Ans:
Degree of elastic of demand : Perfectly Inelastic
Degree of elastic of demand : Perfectly elastic
Degree of elastic of demand : Unitary elastic
Degree of elastic of demand : Relatively elastic
2) In the following diagram AE is the linear demand curve of a commodity. On the basis of the given diagram state whether the following statements are True or False. Give reasons to your answer.
1) Demand at point ‘C’ is relatively elastic demand.
Ans: False
Reason : On the demand curve AE, the distance of CE is less than that of CA. Thus, point 'C' is close to X axis. Therefore, the demand at point 'C' is not relatively elastic, but is relatively inelastic.
2) Demand at point ‘B’ is unitary elastic demand.
Ans: False
Reason : On the demand curve AE, the distance of BE is greater than that of BA. Thus, point 'B' is close to Y axis. Therefore, the demand at point 'B' is not Unitary elastic, but is relatively elastic.
3) Demand at point ‘D’ is perfectly inelastic demand.
Ans: False
Reason : On the demand curve AE, the distance of DE is equal to that of DA. Thus, point 'D' is equally close to X axis and Y-axis. Therefore, the demand at point 'D' is not perfectly Inelastic, but is Unitary elastic.
4) Demand at point ‘A’ is perfectly elastic demand.
Ans: True
Reason : On the demand curve AE, at point 'A' the lower segment of the demand curve is AE and there is no upper segment of the demand curve. Thus, point 'A' the numerical value of upper segment of the demand curve is zero. Thus, at point 'A' the distance AE is greater than that of zero. Thus, point 'A' lies on the Y-axis. Therefore, the demand at point 'A' is perfectly elastic.
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