Quiz on elasticity winter 2018 DOCX -13 KB Close Quiz on elasticity 1. List the
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Quiz on elasticity winter 2018 DOCX -13 KB Close Quiz on elasticity 1. List the determinants of elasticity. Explain what each one is in your own words. (10 pts) Explain what would have to happen to each determinant to make the demand more inelastic. (10) Then, provide a real world example for each determinant (10). Do not use examples from the textbook or form class 2. Explain what each of these numbers means (explain what the number is telling us and how we interpret the number) (4 pts each) Ed = 1.5 Ed = 0.75 Es = 1.75 Exy =-2.75 Ei 0.65 Exy = 1·11 Ei--2.5 Ei-1.25 Ed 1.0 Es 2.3Explanation / Answer
1. Elasticity of demand can be determined by the following factors.
1. Nature of commodity – Nature of commodity like the commodity is a necessity, comfort or luxury also affects the elasticity. If the commodity is a necessity and luxury, the demand will be inelastic. In case of normal goods demand will be elastic.
Example – Demand for salt is inelastic and demand for a luxury car is also inelastic. But demand for a mobile phone is elastic.
2. Availability of substitutes – If the commodity has substitutes has an elastic demand than the commodity which do not have substitutes.
Example – Toothpaste. It has substitute, hence demand is elastic.
3. Use of the commodity – If the commodity has multiple use, the demand will be elastic than the commodity which have a single use.
Example – Coal has several use, hence, demand is elastic.
4. Postponement – The use of commodities that can be postponed has elastic demand than those of which use cannot be postponed.
Example – Medicines cannot be postponed, hence demand is inelastic.
5. Time period – In the long run the demand will be elastic and in short run the demand will be inelastic.
Example – In the long run market the demand will be elastic than in the short run market. Like stock exchange is a short run market.
6. Proportion of income spent is also determines the elasticity. If the proportion of income is more then the elasticity will be more.
Example – Food takes a higher proportion of our income. Any change in the price of food affect our use of food. Hence, its demand is elastic.
7. Durability of commodity is also a factor which determines elasticity. For durable commodities the demand is elastic and for perishable, it will be inelastic.
Example – Goods like milk, etc is perishable and hence has inelastic demand.
2.
Ed = 1.5 – Relatively Elastic Demand – Percentage change in the quantity demanded is more than the change in the price.
Ed = 0.75 – Relatively inelastic demand – Percentage change in the quantity demanded is less than the change in the price.
Es = 1.0 – Unitary elastic supply – Percentage change in the quantity supplied is equal to the change in the price.
Es = 1.75 – Relatively Elastic Supply – Percentage change in the quantity supplied is more than the change in the price.
Exy = -2.75 – Relatively elastic demand and x and y are complementary goods.
Ei = 0.65 – Positive income elasticity of demand.
Exy = 1.11 – Relatively elastic demand and x and y are Substitute goods.
Ei = -2.5 – Negative income elasticity and the good is an inferior good.
Ei = 1.25 – Positive income elasticity of demand and good is a normal good.
Ed = 1 - Unitary elastic supply – Percentage change in the quantity Demanded is equal to the change in the price.
Es = -2.3 – means price and supply is moving in a negative direction.
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