2Introduction to Microeconomics – ECO 101

Tutorial-4
Topic: Elasticity of Demand

Question 1:
Calculate values of Price Elasticity for all the situations below:

% change in quantity % change in Elasticity of

Price Quantity
demanded price Demand

Initial New Initial New

25 30 100 40 60%  20%  3

40 70 120 90  25% 75%  0.33333

200 220 80 64 19%  10%  1.9

50 75 150 135  10%   50% 0.2

In each case identify whether you would describe it as elastic / unitary elastic / inelastic

1. elastic

2. inelastic
3. elastic

4. inelastic.
Question 2:

E L A S T I C MONEY?

Different elasticity values will lead to different effects on the level of total revenue a firm
receives. For example, if a good is elastic and a firm increases the price by 10%, they will lose
more than 10% of their business, and so although they are getting more money for each one
they sell, they are selling far fewer.

TR=Price x Quantity Sold

To see the effect that elasticity has on total revenue, fill in the table below:

Price Quantity Revenue

Price Elasticity of Demand
Initial New Initial New Before price change After price change

25 30 100 40 2500  1200  0.48

40 70 120 90 4800  6300  1.31

200 210 80 64 16000  13440  0.84

50 75 150 135 7500  10125  1.35

Has revenue increased or decreased in each case?

1. revenue has decreased.

2. revenue has increased.

3. Revenue has decreased.

4. revenue has increased.

Question 3:

Judge the products in the table below to decide whether you think they
will be elastic or inelastic:

Product Elastic or inelastic? Why?

 Because we need it for everyday cooking

purpose, without salt we wont get the same
Salt  Inelastic.
texture. And there is no other substitute for
salt

 People can travel to other places for

vacation if the price increase for Hawaiian
Hawaiian Vacation  elastic
vacation there are several other substitution
for Hawaiian vacation.

 No matter how much they charge iphone

Apple iPhone  inelastic
user will keep on buying iphone.

 Chainsmoker will keep on purchasing

Cigarettes  Inelastic. cigarette even if the price rises due to
addiction. There are no or few substitution.

If we have car we will have to buy

gasoline, in order to travel from one place
Gasoline  Inelastic.
to another and there is no substitution of
gasoline.

Question 4:

Create example from your own for the determinants of elasticity. Show the graphs too.