Elasticities Trivia Quiz

Answer: relatively inelastic

The Price Elasticity of Demand measures the responsiveness of the quantity demanded of a good to a change in its own price. PED = change in Quantity/change in Price.

The Good X has a relatively inelastic demand because PED is less than 1 and greater than -1, which means that the relative change in the quantity demanded of the product is less than the relative change in its price.

In the case of the relatively elastic demand the PED is greater than 1 or PED is less than -1, which means that the relative change in quantity demanded of a product is greater than the relative change in its price.

If it's a perfectly elastic demand then the PED = infinity because the producer can sell all his output at the prevailing market price, however if he increases the price then the demand will fall to zero. The demand curve for this type of elasticity is a horizontal line parallel to the Quantity axis.

In the case of the unitary elasticity the PED = 1 or PED = -1, which means that the relative change in quantity demanded of the product is equal to the relative change in its price.

Answer: it falls

With elastic demand the Total Revenue changes in the opposite direction to the price i.e if the price increases then the Total Revenue falls.

The Total Revenue would increase only if the demand for the good is inelastic and it would remain unchanged if the product has unitary elasticity.

Answer: it will be positive

Cross Elasticity of Demand is the responsiveness of the quantity demanded for Good B to a change in the price of Good A.

If the two goods are close substitutes, e.g. green tea and black tea, then the CED will be positive if the price for either green or black tea goes up. For instance if the price of the black tea increases, then the consumers will switch to buying the green tea as its price remained unchanged. This will increase the demand for the green tea and therefore the CED will be positive.

The CED will be negative in the case of complementary goods like car and petrol. If the price of the car increases then the demand for petrol will fall.

The CED is equal to zero when the two goods are completely independent of each other e.g. coffee and car. Even if the price of the coffee increases there will be no effect on the demand for cars.

The CED is equal to infinity if the two goods are perfect complements e.g. left and right shoe. One cannot be sold without the other. The ratio between the sales of two products will always be 1:1.

Answer: negative

The Income Elasticity of Demand is the responsiveness of the quantity demanded of a product to the change in the consumers' income.

A Giffen good is an inferior good i.e. it does not follow the general law of demand: the lower the price of the commodity, the greater the demand for it. It is a good of low quality which forms an important element of the daily ration of poor families. This type of good is very uncommon in the developed countries. We might see this good in the extremely poor countries where families spent a great proportion of their income on one good e.g. potatoes.

The Income Elasticity of Demand for such a good will be negative because as people earn higher incomes they will spend less money on this good, switching to goods of better quality.

Answer: The total profit the producer makes by selling the commodity

The total profit that producer makes by selling the commodity does not affect the Price Elasticity of Demand. The PED is the responsiveness of quantity demanded to change in price and the total profit earned by the producer will have nothing to do with the PED.

Other factors do affect PED.
Proportion of income spent on the commodity: If the commodity forms an important part of the consumer's total expenditure then the quantity demanded will be sensitive to price changes i.e. elastic demand.

Durability of the commodity: if the commodity is very durable then its demand is elastic because the consumers can postpone the replacement of the product when the price goes up hoping that it will fall again.

Type of the commodity: Necessities are essential in our lives, therefore the demand for them is inelastic as it will not be affected significantly by the changes in their price. Luxuries, on the other hand, are not essential, therefore the demand for them is elastic because if the price goes up we will not be willing to buy them.

Answer: goods with inelastic demand

Indirect taxation will increase the price of the goods. It should be levied on goods with an inelastic demand because they are less sensitive to the changes in price e.g. alcohol and tobacco. Most people will continue to buy cigarettes and alcohol even if their price rises. In this way government will collect more taxes and increase its revenue.

If the government levies indirect taxation on goods with elastic demand then the demand for these goods will fall significantly after the increase in price. The government will end up with the reduced tax revenue even after increasing the indirect taxation.

Answer: negative

Plastic shoes are a type of inferior goods as they do not follow the general law of demand. They will have a negative Income Elasticity of Demand because as income rises people will now be able to afford to buy shoes of better quality, therefore the demand for plastic shoes will fall.

Answer: inelastic

The good will have an inelastic supply because the producer will not be willing to supply more to the market even if the price of the good increases. He will not be willing to endure the costs associated with the production of each additional unit of the commodity.

If the unit costs decreased with the greater production then the supply would be elastic, as the producer will supply more to the market thus earning bigger profits.

Answer: +0.5

The Price Elasticity of Supply = change in quantity supplied/change in price.
The PES = +20%/+40% = +0.5.
The supply of this good is inelastic as PES is less than 1.

Answer: -0.5

Cross Elasticity of Demand = change in the demand for Good A/change in price of Good B.
CED = -10%/+20% = -0.5.
The two goods are complementary as the rise in the price of one of them leads to the decrease in the demand for the other.