ELASTICITY QUESTIONS KEY

Answer 1) Write their definition and formula only.

Answer 2) If the quantity demanded doesn’t change when the price changes, the price elasticity of
demand is zero and the good as a perfectly inelastic demand

If the percentage change in the quantity demanded is infinitely large when the price barely changes . The
price elasticity of demand is infinite and the good has a perfectly elastic demand
Answer 3) A curve can be

1) Perfectly inelastic
2) Perfectly Elastic
3) Unit Elastic

Note: You MUST draw the curve for all three to clearly show the difference!

Answer 4)

i) Salt is a necessity therefore its increase in price will not affect the change in quantity
demanded very much therefore it should have inelastic demand.
ii) Insulin is a necessity for diabetic patients its increase in price will not affect the change in
quantity demanded very much therefore it would also have inelastic demand.
iii) Iphone is a luxury item a small change in price would have a large effect therefore it has
highly elastic demand.
iv) Loius Vuittonis a luxury item it would also depict highly elastic demand.
v) Since Butter and Margarine are considered substitutes. The increase in the price od
margarine will increase the demand of butter the cross price elasticity for Butter should be
positive.
vi) Soft drinks and juices are substitutes. If the price of juices decreases the demand for soft
drinks will also decrease there cross price elasticity for soft drinks will be positive.
vii) Sims and Mobile Phones are compliments therefore if the price of mobile phone rises the
demand for sims will decrease and cross price elasticity of sims will be negative.

Note: Draw the curve where ever possible. Graph has marks

Q5.

I) As income increases the demand for gem stones increases this shows that gem stones are
normal goods.
II) As income increases the demand for tailored stitched clothes decreases and designer wear
increases, therefore tailored stitched clothes are inferior goods and designers wear are
normal goods.
III) As income increases travelling in Pakistan decreases and International trips increases this
shows, therefore travelling in Pakistan would become an inferior good or service while
international travelling is a normal good or service.
IV) Due to increase in income demand for pizzas increases therefore pizzas are normal good.

Answer 6)

Factors that influence the elasticity of demand

The elasticity of demand for a good depends on:

1. Closeness of substitutes

The closer the substitutes for a good or service, the more elastic are the demand for it.

 Necessities , generally have inelastic demand.

 Luxuries, generally have elastic demand.

2. Proportion of income spent on the good

The greater the proportion of income consumers spent on a good, the larger is its elasticity of
demand.

3.Time Elapsed Since Price Change

The longer that a good can be stored without losing its value, the more elastic is the demand.

Answer 7) The elasticity of supply measures the responsiveness of the quantity supplied to a change
in the price of a good when all other influences on selling plans remain the same.

(write the formula of elasticity of supply)

Answer 8) Factors that influence the elasticity of supply

The elasticity of supply depends on:

 Resource substitution possibilities

 Time frame for supply decision

1.Resource Substitution Possibilities

The easier it is to substitute among the resources used to produce a good or service, the greater is
its elasticity of supply.

2.Time Frame for Supply Decision

The more time that passes after a price change, the greater is the elasticity of supply.