Price elasticity measures the responsiveness Solution 2022

Solutions:
1.
1.1
0 50 100 150 200 250 300 350
0
5
10
15
20
25
30
35
40
45
A ( 320, 0)
B (280, 5)
C (240, 10)
D (200, 15)
E (160, 20)
F (120. 25)
G (80, 30)
H (40, 35)
I (0, 40)
Demand Curve
Quantity demanded
Price
1.2
Price elasticity measures the responsiveness of the quantity demanded of a good
to a change in its price.
It is computed as the:
Price elasticity of demand = % change in Quantity demanded/ % change in
Price.
Price elasticity of demand at price $10 = 0.23%
Price elasticity of demand at price $20 = 0.77%
Price elasticity of demand at price $30 = 2.20%
As it can be seen that price elasticity of demand differs on various point, at price
$ 10 it is 0.23%, at point $20 it is 0.77% and at point $30 it is maximum at 2.2%.
The law of demand states that there is an inverse relationship between price and
demand for good. Above midpoint of demand curve elasticity of demand remain

greater than one and below midpoint elasticity of demand remain less than one.
At mid point Price elasticity of demand remain = 1.
Price elasticity of demand coefficient’s numerical value could range from zero to
infinity. Price elasticity of demand is based off percent changes in price and
subsequently, percentage change in quantity demanded. At low prices and high
quantises, the price elasticity of demand is therefore more inelastic. Similarly, at
high prices and low quantities Price elasticity of demand is more elastic. ("Price
elasticity of demand and price elasticity of supply", 2019)
2.
2.1
Q = 200 - 3P + 5Pc+2Y
Three coefficients in above demand equation can be explained as:
First of all, all of the given coefficients denote the following:
For Price Elasticity (-3) = change in Quantity/Change in Price
For Cross elasticity (5) = change in Quantity/Change in Price with respect to X
For Income elasticity (2) = change in Quantity/Change in Income
-3P shows inverse relationship between price and demand, which is denoted by
negative sign -3.
Coefficient 5Pc indicates, when the price of another good changes, which is
close substitute to given goods, demand of given good changes very large than
change in price of close substitute good, for example, change in price of 5% of
substitute goods can raise the demand to 50 to 60%, it is called cross price
elasticity of demand, which coefficient here is 5. ("Elasticity of Demand: Meaning and Types
of Elasticity (explained with diagram)", 2019)
2Y denotes the change in income and impact of it in demand for a good.
These all above point can be further elaborated in following way.
When, except for a change in the price of good itself, any other things that cause
an increase or decrease in demand for a good will lead to a shift in the demand
curve. Demand shift can be attributed due to following reason: -
Change in taste or increase/decrease in taste for a good could shift demand
curve.
Increase or decrease in incomes of people could shift demand curve.
High or low price for substitute goods can cause the demand change for goods
but not because of change in price of goods but due to change in price of

substitute goods (e.g. higher price of tea causes an increase in demand for
coffee, thus shift right in demand for coffee).
2.2.
Assume P= $1 400; Pc = $660 and Y = $2 000.00 per month.
Q = 200-3(1400) +5(660) +2(2000)
Q = 200 – 4200 + 3300 + 4000 = 3300
Price elasticity of demand = (Change in Quantity/ Change in Price)*
Price/Quantity
Price elasticity of demand = -3 (1400/3300) = -2.57
Cross Price elasticity of demand with respect to X
= (Change in Quantity/ Change in Cross Price X)* Cross Price X/Quantity
Cross Price elasticity of demand with respect to X = 5 (660/3300)
= 1
Income elasticity of demand = (Change in Quantity/ Change in Income)*
Income/Quantity
Income elasticity of demand = 2 (2000/3300) = 1.21
2.3
Price Elasticity demand means change in demand owing to change in price
of commodity, as demand’s sensitivity to change in price is remain very
high or responsive of demand to the change in price. Demand extends or
contracts respectively with a fall or rise in price.
Elasticity can be of following types:
There are mainly three types of elasticises are there and all of them are of
different nature, these are, Price Elasticity demand, Income Elasticity
demand and Cross Elasticity demand.
Price Elasticity is the responsiveness of demand to change in price;
Income Elasticity means a when consumer’s income changes demand
also changes, but here it is, due to change in income not due to change in
price, price of good remain constant.
Cross Elasticity means a change in the demand for a commodity owing
to change in the price of another commodity of similar nature or very
close substitute.