San Jose Community College

San Jose, Malilipot, Albay

ECON 2

ECONOMIC ANALYSIS
Lesson: 06
DEMAND ELASTICITY

Lea O. Ibarra
CBPA_ MM
2-I

Ms. Ysabel Grace Belen

Instructor …..…
Lea O. Ibarra CBA- MM 2-I

6.6 SELF- ASSESSMENT QUESTIONS

6. Define the concept of elasticity of demand. Discuss its significance in theory of demand.

Answer: The elasticity of demand refers to the degree to which demand responds to a
change in an economic factor. Price is the most common economic factor used when
determining elasticity. Other factors include income level and substitute availability.
Elasticity measures how demand shifts when economic factors change. Elasticity of demand
is an important concept in the theory of demand because it helps to explain how changes in
price affect the quantity of a good or service that consumers are willing to purchase. It is
also used to measure the sensitivity of consumers to changes in price, which can be used to
inform pricing strategies.
7. “The concept elasticity is a versatile tool of economic analysis.” Discuss the validity of this
statement with appropriate examples.
Answer: The elasticity is a versatile tool of economic analysis is valid as it measures of the
responsiveness of one economic variable to changes in another. It is used to measure the sensitivity
of demand or supply to changes in price, income, or other factors. Elasticity is a useful tool for
economists to analyze how changes in one variable will affect another For example, elasticity can be
used to measure the responsiveness of demand for a good or service to changes in its price. If the
demand for a good is elastic, then a small change in price will lead to a large change in the quantity
demanded. On the other hand, if the demand for a good is inelastic, then a small change in price
will lead to a small change in the quantity demanded. Additionally elasticity is a versatile tool of
economic analysis that can be used to measure the responsiveness of demand and supply to changes
in price, income, and other factors.
8. What do you understand by price elasticity of demand? How is it measured?
Answer: Price elasticity of demand is a measurement of the change in the consumption of a
product in relation to a change in its price. Expressed mathematically, it is:
Price Elasticity of Demand = Percentage Change in Quantity Demanded ÷ Percentage Change in Price

The price elasticity of demand (PED) measures the percentage change in quantity demanded by
consumers as a result of a percentage change in price. This measurement of price elasticity of
demand is calculated by dividing the % change in quantity demanded by the % change in price,
represented in the PED ratio.
9. Discuss briefly the factors on which price elasticity of demand for a commodity depends.
Answer: Elasticity is a general measure of the responsiveness of an economic variable in response to
a change in another economic variable.
The three major forms of elasticity are price elasticity of demand, cross-price elasticity of demand,
and income elasticity of demand.
The four factors that affect price elasticity of demand are (1) availability of substitutes, (2) if the
good is a luxury or a necessity, (3) the proportion of income spent on the good, and (4) how much
time has elapsed since the time the price changed.
If income elasticity is positive, the good is normal. If income elasticity is negative, the good is
inferior

Factors Affecting the Price Elasticity of Demand

The basic determinants of the price elasticity of demand for a commodity are:

 Availability and closeness of substitutes; demand for a commodity is more elastic if there
are close substitutes for it.
 Nature of the commodity; in general the demand for necessities is less elastic, for comforts
are moderately elastic and for luxuries is more elastic. Demand for prestige goods is price
inelastic. Also the demand for durables is more price elastic than that for non-durables.
 Time frame of analysis; demand is more elastic in the long run than in short run.
 Variety of uses of the commodity; the more the possible uses of a commodity the greater its
price elasticity will be.
 The proportion of income spent; in general the demand for commodities which entail a
large proportion of the income of the consumer is more elastic than that of commodities
with a small proportion of income.
 Level of prices; the demand for commodities is elastic when price level is high and is less
elastic when price level is low.

10. What do you understand by point and arc price elasticities of demand? How are these
measured?
Answer: Point elasticity of demand measures the elasticity at a point on demand curve. Mainly it s
the ratio of percentage change in quantity demanded of a good to percentage change in its price
calculated at a specific point on the demand curve.
Arc elasticity is the elasticity of one variable with respect to another between two given points. It is
used when there is no general function to define the relationship between the two variables. Arc
elasticity is also defined as the elasticity between two points on a curve. The concept is used in both
mathematics and economics.

11. A list of goods is given below. Will there demand be less elastic, moderately elastic, highly elastic
or completely inelastic? Give brief reasons in support of your answer.
(a) demand for petrol
 MODERATELY ELASTIC
 The demand for petrol is moderately elastic as when the cost of petrol rises, the customers
will decrease the use of it.
(b) demand for needles
 INELASTIC
 The demand for needle if inelastic because a very small proportion of consumer’s income is
spent on.
(c) demand for textbooks
 INELASTIC
 The demand for textbooks is inelastic because even if the price rises the demand will never
change. Demand for text books is completely inelastic. In case of text books, even a
substantial change in price leaves the demand unaffected.
(d) demand for seasonal vegetables
 INELASTIC
 Demand for seasonable vegetables is inelastic because it is a necessary good
(e) demand for salt
 INELASTIC
 Salt is inelastic because there are no good substitutes; it is a necessity to most people, and it
represents a small proportion of most people’s budget.
(f) demand for milk
 MODERATELY ELASTIC
 The demand for milk is elastic because when the price of the milk increases the consumer
starts taking less quantity of milk.
(g) demand for cars
 HIGHLY ELASTIC
  The demand for cars is elastic as it is a luxury good so when the price of a car goes up, the
demand for it comes down
(h) demand for Hutch cellular services
 HIGHLY ELASTIC
 The demand for Hutch Cellular services is highly elastic, as the price of there services from
a particular carrier have many substitutes, which means that a change in price will have a
large impact on the quantity demanded and that demand is highly elastic.

7. Discuss the relationship between price, quantity demanded, marginal revenue, total revenue and
price elasticity of demand.
Answer: If the demand for the product is price inelastic, the firm would not want to lower its price
since that would reduce its total revenue, increase its total costs and this give it lower profits.
There is a relationship between its marginal revenue curve and elasticity. Where marginal revenue
is positive, demand is price elastic. Where marginal revenue is negative, demand is price inelastic.
Where marginal revenue is zero, demand is unit price elastic.
If the firm faces an elastic demand curve, a small change in price will result in positive marginal
revenue.
•When demand is elastic, total revenue increases with a decline in price and decreases with a rise in
price. This is because when demand is elastic, a price change leads to a proportionately larger
opposite change in quantity demanded that results an increase in total revenue when price declines
and a decrease in total revenue when price rises.

8. What do you understand by cross-price elasticity of demand? How is it measured?

Answer: The cross price elasticity of demand measures the responsiveness of the demand for
commodity X to a change in the price of commodity Y. Thus, cross-price elasticity of demand is the
ratio of the percentage change in the demand for commodity X to the percentage change in the
price of commodity Y, assuming all other factors influencing demand remain unchanged

9. What do you understand by point and arc cross-price elasticities of demand? How are these
measured?
Answer: Point elasticity is the price elasticity of demand at a specific point on the demand curve
instead of over a range of it.
The cross elasticity of demand is an economic concept that measures the responsiveness in the
quantity demanded of one good when the price for another good changes. Also called cross-price
elasticity of demand, this measurement is calculated by taking the percentage change in the
quantity demanded of one good and dividing it by the percentage change in the price of the other
good.
 1. Point elasticity of demand takes the elasticity of demand at a particular point
on a curve (or between two points)
2. Arc elasticity measures elasticity at the midpoint between the two selected
points:
Point and cross-price elasticities of demand measure the responsiveness of demand for a good or
service to changes in its own price and the price of related goods or services. Point elasticity of
demand measures the responsiveness of demand for a good or service to changes in its own price,
while cross-price elasticity of demand measures

The responsiveness of demand for a good or service to changes in the price of related goods or
services. Point and cross-price elasticities of demand are measured by calculating the percentage
change in the quantity demanded of a good or service in response to a given percentage change in
its own price or the price of related goods or services. This is done by dividing the percentage
change in the quantity demanded by the percentage change in the price.

10. What do you understand by income elasticity of demand? How is it measured?

Answer: Income elasticity of demand refers to the sensitivity of the quantity demanded for a certain
good to a change in the real income of consumers who buy this good.
The formula for calculating income elasticity of demand is the percent change in quantity
demanded divided by the percent change in income. With income elasticity of demand, you can tell
if a particular good represents a necessity or a luxury.

11. What do you understand by point and arc income elasticities of demand? How are these
measured?
Answer: Point income elasticity provides a measure of the responsiveness of demand for a
commodity at a specific income level over the demand function. It is measured as:

Arc income elasticity of demand for a commodity is a technique for computing income elasticity
between two income levels of the consumers. It is measured as:
12. Write short notes on:
(a) Point elasticity
 Point Elasticity measures elasticity at a finite point of the demand curve.
(b) Arc elasticity

 Arc Elasticity measures elasticity at the central point of an arc between a pair of two points
on the demand curve.
(c) Advertisement elasticity of sales

 Advertisement elasticity of demand is also known as the promotional elasticity of demand.

It quantifies the change in quantity demand as a result of a change in advertisement
expenditure.
 Advertising elasticity measures an advertising campaign’s effectiveness in generating new
sales. It is calculated by dividing the percentage change in the quantity demanded by the
percentage change in advertising expenditures.
(b) Elasticity of price expectations

 The price expectation elasticity refers to the expected change in future price as a result of
change in current prices of a product.