3B Elasticity of Demand

Q.1. A)
1. (A)
B)
1. Cross elasticity of demand
2. Perfectly elastic demand
3. Prof. Alfred Marshall
C)
1. c.
2. d.
D)
1. perfectly elastic demand
2. necessities
Q.2. 1. Concept: Positive income elasticity
Explanation:
i. Income elasticity of demand is a ratio of proportionate change in quantity demanded of a
commodity to a proportionate change in income of an individual. Normal good have positive
income elasticity.
ii. Hence, this illustration relates to the concept of ‘positive income elasticity’ as Preeti’s demand
for clothes increased when her income increased.
2. Concept: Price elasticity of demand
Explanation:
i. Price elasticity of demand is a ratio of proportionate change in quantity demanded of a
commodity to a given proportionate change in its price. In simple words, price elasticity is
responsiveness of demand due to a change in price only.
ii. Hence, this illustration relates to the concept of ‘price elasticity of demand’ as the demand for
TV sets increased due to a change in its price.
Q.3. 1. Yes, I agree with the given statement.
Reason: Refer to Q.1 - 3 from theory section.
2. No, I do not agree with the given statement. The concept of elasticity of demand is significant to
producers, government, consumers, farmers, foreign trade etc.
Reason: Refer to Q.1 - 5 from theory section.
Q.4. 1. Elasticity of demand refers to the degree of responsiveness of quantity demanded to a change in price
of that commodity. In simple words, elasticity of demand is the ratio of percentage change in quantity
demanded to a percentage change in its price.
The following are the factors influencing elasticity of demand:
1) COMPLEMENTARY GOODS
The goods which are demanded jointly in order to satisfy a single want are called as
complementary goods. The demand for complementary goods is generally relatively inelastic.
E.g.:
i. A person having a printer will have a relatively inelastic demand for ink catridge.
ii. A person having a car will have a relatively inelastic demand for petrol
2) URGENCY OF NEED
The goods which are needed urgently will have a relatively inelastic demand. E.g.: medicines.
Luxury goods which are less urgent have relatively elastic demand.

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3) TIME PERIOD
Elasticity of demand is always related to period of time. It varies with the length of time. In
short term, demand is generally relatively inelastic. However, in long term, demand is relatively
elastic as consumer can change his consumption habit and find cheaper substitutes in the long
run.
4) INCOME OF THE CONSUMER
A consumer with higher income will have a relatively inelastic demand as compared to a
consumer having lower income.
E.g.: Mr. Mukesh Ambani will not stop commuting by helicopter even if the price of aviation
fuel rises. On the other hand, if the prices of certain foodstuffs increase, a poor person might
reduce his consumption.
5) NATURE OF THE COMMODITY
Commodities which are necessities have an inelastic demand (i.e. change in price will have less
effect on quantity demanded) as it is necessary for survival. On the other hand, comfort goods
or luxury goods have an elastic demand (i.e. change in price will have an effect on quantity
demanded)
6) HABITS
The demand for commodities which are consumed as a habit or preference is inelastic.
E.g.:
i. A coffee drinker’s demand for coffee powder will be inelastic
ii. A smoker’s demand for cigarette will be inelastic.
7) AVAILABILITY OF SUBSTITUTES
The demand for a commodity will be relatively elastic if its close substitute is available in the
market. E.g.: Surf Excel & Ariel, Pepsi & Coke, Tea & Coffee.
The demand for a commodity will be relatively inelastic if its close substitute is not available in
the market. E.g.: Salt, public transport, academic books of a particular publisher etc.
8) NUMBER OF USES
The demand for commodities having single use will be relatively less elastic. E.g.: Cooking oil,
washing powder etc.
The demand for commodities having multiple uses will be relatively more elastic. E.g.: Coal,
electricity
9) DURABILITY
The demand for durable goods is relatively elastic. E.g.: Furniture, washing machine etc. The
demand for perishable goods is relatively inelastic. E.g.: milk, meat, vegetables etc.
10) PROPORTION OF INCOME SPENT
If consumers spend a small amount of their income on consumption of various goods, then
their demand for such goods is likely to be inelastic. However, if they are spending a large
portion of their income on certain goods, then they would spend it carefully and such goods are
likely to have an elastic demand.
11) POSSIBILITY OF POSTPONEMENT OF DEMAND
The demand for a commodity whose purchase can be postponed will be elastic.
E.g.: fridge, car, sofa, mobile etc.
The demand for a commodity whose purchase cannot be postponed will be inelastic.
E.g.: medicines, academic books etc.