Chapter 3: Elasticity

Chapter 3:
Elasticity
CHAPTER 3: ELASTICITY
End of in this chapter, student should know:

 Define elasticity

 Explain types of elasticity demand/supply

 Calculate the price/cross/income elasticity of demand of
a good and services and the price elasticity of supply

 Interpret the meaning of elasticity value derived from
the calculations performed

 Able to apply the knowledge of elasticity to practical uses

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 Chapter 3: Elasticity

PART A: STRUCTURED QUESTIONS

1. The schedule below shows the relationship between the prices of good A and the quantities of

Goods A and B demanded.

Price of Good A (RMPer Quantity Quantity

kg) demanded for demanded for
Good A (kg) Good B (kg)

3.00 1 500 1 000

3.50 1 200 800

4.00 1 000 700

5.00 800 500

1. Calculate the price elasticity of demand for Good A if the price of Good A increases

from RM 3.50 to RM 5.00 per kg. State whether it is elastic or inelastic.

(3 points)

2. Sketch a diagram to show the situation in a).

( 1 point)

3. Calculate the cross elasticity of demand for good B when the price of good A

decreasesfrom RM 4.00 to RM 3.00 per kg. What is the relationship between

goods A and B? (3 points)

4. When the income of the household increases from RM 100 to RM 144, the

demand for good A decreases from 1000 kg to 800 kg. Calculate the income

elasticity of demand for good A and classify the type of good A. (2 points)

5. Given the coefficient of income elasticity of demand for good B is positive and
more than one. What is the type of good B?

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2. Answer the following questions based on the table below.

Price of Pepsi (RM) Quantity demanded Quantity demanded Consumer’s income
Pepsi (cartoons) Coca Cola (cartoons) (RM)
250 200 200 2000
300 160 300 1800
350 120 400 1600
400 80 500 1400

a. Define elasticity.

(2 points)

b. Calculate the price elasticity of demand for Pepsi when the price of Pepsi decrease from RM300 to
RM250?
(2 points)

c. Indicates whether the demand is elastic or inelastic? Why?

(2 points)

d. Calculate the cross elasticity of demand for coca-cola when the price of Pepsi increase from RM350 to
RM 400 per cartons. Are Pepsi and coca-cola complement or substitute good?
(2 points)

e. Determine the income elasticity of demand for coca-cola when consumer’s income increase from
RM1600 to RM2000.
(2 points)

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3. A local firm produced three types of pizza, for delivery to homes in the area. The owner has
researched to discover the elasticity for each of three pizzas.
Price of Pizza A Pizza A Pizza B Pizza C Price of Pizza C
(RM) (Qd) (Qd) (Qs) (RM)
12 1000 100 300 3
11 1040 200 400 4
10 1080 600 500 5
9 1120 1000 600 6
8 1160 1400 700 7
7 1200 1800 800 8
6 1240 2200 900 9
5 1280 2600 1000 10

a) Calculate the price elasticity demand for Pizza A if the price for Pizza A increases from RM5.00 to
RM9.00.

(2 points)

b) Calculate the cross elasticity demand for Pizza B when the price of Pizza A increase from RM7.00
to RM11.00
(2 points)

c) Based on (a) state whether the firm should increase or decrease the price if it wishes to increase
its sales revenue and give ONE (1) reason.
(2 points)

d) Calculate the price elasticity of supply for Pizza C if the price of Pizza C decrease from RM8.00 to
RM5.00
(2 points)

e) State TWO (2) determinants of price elasticity demand and price elasticity supply

(2 points)

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4. Answer the following questions by using the data in the table below:

Price of Good X per Quantity Demanded of Quantity Demanded of Consumer’s Income per
unit (RM) Goods X Goods Y month (RM)
12 4 12 600
10 6 10 500
8 8 8 400
4 10 6 300
6 128 4 200

a) Define the price elasticity of demand.

(2 points)

b) Calculate the cross-elasticity of good Y when the price of goods X decreases from RM10 to RM8. What
is the relationship between the two goods?
(4 points)

c) Calculate income-elasticity of goods X when consumer’s income increase from RM400 to RM600. What
type of good X?
(4 points)

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5. Answer the following questions based on the table below.

Price of Good Quantity Demanded good X Quantity Demanded good

X (Million) Y (Million)
5 260 200
10 240 220
15 220 240
20 200 260

a. Calculate the price elasticity of demand for good X if the price of good X increases from RM5 to
RM10 per unit. State whether it is elastic or inelastic.
(2 points)

b. Calculate the cross elasticity of demand for good Y when the price of X falls from RM 20.00 to RM
10.00. Indicate the relationship between X and Y.
(2 points)

c. Assume that when consumer’s income increase from RM 1200 to RM 1700, the demand for good
Y increases from 220 to 260 units. Calculate the income elasticity of demand for Y. What type of
good is Y?
(2 points)

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Answer the following question:

i. The quantity demanded coconut increase from 100 to 150 units as its price decrease from
RM2.50 to RM2.30 per units. Calculate the price elasticity of demand for coconut and state the
degree of elasticity.
(2 points)

ii. The quantity demanded iPhone remains at 250 units as the price of Perodua Ativa decrease
from RM72,000 to RM70,000. Calculate the cross elasticity of demand for iPhone and state the
types of relationships between iPhone and Perodua Ativa.
(2 points)

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5. Refer to the following table

Price of Good E (RM) Quantity demanded of Quantity demanded for Consumer’s income
Good E good R (RM)
20 2 10 500
18 4 8 450

16 6 6 400
14 8 4 350

a) Calculate the price elasticity of demand for Good E when its price increase from RM4 to RM6. What is
the degree of elasticity of demand? (3 points)

b) Calculate the cross elasticity of demand for good R when the price of Good E decrease from RM8 to
RM6. What is the relationship between Good E and Good R? Give an examples of Good E and Good R.
( 4 points)

c) Calculate the income elasticity of demand for good R when income of consumer increase from Rm350
to RM500. What types of Good is R? ( 3 points)

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6. The table below shows the relationship between the price of good A and the quantity demanded
good A and B.

Price of Good A (RM) Quantity demanded for Good A (kg) Quantity Demanded for Good B (kg)

3.00 1500 1000

3.50 1200 800

4.00 1000 700

5.00 800 500

a) Calculate the price elasticity of demand for good A when its price increases from RM3.00 to RM5.00. Is
the price elastic or inelastic? (2 points)

b) Determine FOUR (4) factors which influence the price elasticity of demand.
(4 points)

c) Calculate the cross elasticity of demand for good B when price of A decreases from RM4.00 to RM3.00.
What is the relationship between good A and good B?
(4 points)

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7. The following table shows the amount of good H and Z demanded by citizens of a particular
country at different prices and consumer income levels.
Price of good H Quantity demanded Quantity demanded Income of
(RM) for Good H (unit) for Good Z (unit) consumers (RM)

60 100 20 4,500

65 90 30 3,500

70 70 50 2,500

75 40 70 1,500

80 10 85 500

a) Calculate the price elasticity of demand for good H if the price of good H increases from RM70 to
RM75. Is the price elastic or inelastic? (2 points)

b) Calculate the cross elasticity of demand for good Z when the price of good H decreases from RM80 to
RM70. What is the relationship between the two goods? (2 points)

c) If the consumers’ income level increases from RM3,500 to RM4,500, determine the income elasticity of
demand for; (2 points)

i. Good H

ii. Good Z

d) Define the cross elasticity of demand. (2 points)

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8. Refer to the table below and answer all the questions.

Price of Good X Quantity demanded Quantity demanded Consumer’s
(RM) of Good X (unit) of Good Y (unit) income (RM)

10 2 10 2000

8 4 8 1800

6 6 6 1600

4 8 4 1400

2 10 2 1000

a) Calculate the price elasticity of demand for good X when its price increases from RM4 to RM8. Is the
price elastic or inelastic? (2 points)

b) Calculate the cross elasticity of demand for good Y when the price of good X decreases from RM6 to
RM2. (2 points)

c) What is the relationship between the two goods? Justify your answer. (2 points)

d) Calculate the income elasticity of demand for good X and good Y when the income increases from
RM1400 to RM2000. (4 points)

e) What type of good X and good Y? (2 points)

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9. The table below shows the relationship between price of good X and quantity demanded for
Good A, B and C.
Price of Good X Quantity demanded (units)
(RM) Good A Good B Good C
2.00 18 30 25
4.00 16 32 20
6.00 14 34 15
8.00 12 36 10
10.00 10 38 5

a) Define cross elasticity of demand. (2 points)

b) If the price of Good X increase from RM4.00 to RM10.00, calculate cross elasticity of demand for:
i. Good A

ii. Good B ( 4 points)

c) Determine the relationship between

i. Good A and Good X

ii. Good B and Good X (2 points)

d) When the income of household increases from RM300 to RM500, the demand for good C decrease
from 20 to 10 units. Calculate the income of demand for Good C and classify Good C.
(2 points)

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PART B: SHORT ESSAY

QUESTION 1

a) Explain any FOUR (4) degree of price elasticity of demand

(5 points)

b) Explain FOUR (4) determinants of price elasticity of demand

(5 points)

QUESTION 2

a) List any FIVE (5) degree of price elasticity of demand

(5 points)

b) Differentiate between substitute good and complementary goods.

(10 points)

QUESTION 3

a) Explain any FOUR (4) types of good in the income elasticity of demand.
(5 points)

b) Explain FOUR (4) determinants of price elasticity of supply

(5 points)

QUESTION 4

a) Using suitable example, differentiate between complementary good and substitute’s goods.
b) Explain the concepts below:
i. Inelastic
ii. Normal goods
iii. Luxury goods
iv. Interior goods

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