Question 16 Marks
Answer the following questions
(i) A consumer buys 5 units of good at a price of Rs.4 per unit. When price falls to Rs.3 per unit, he buys 10 units. Calculate price elasticity of demand.
(ii) Explain the effect of the following on Price Elasticity of Demand of a commodity.
i. Number of substitutes.
ii. Nature of the commodity
(i) A consumer buys 5 units of good at a price of Rs.4 per unit. When price falls to Rs.3 per unit, he buys 10 units. Calculate price elasticity of demand.
(ii) Explain the effect of the following on Price Elasticity of Demand of a commodity.
i. Number of substitutes.
ii. Nature of the commodity
Answer
View full question & answer→(1) Price elasticity of demand in this question is calculated as follows:
$\begin{array}{l}\Delta Q =10-5=5 \\ \Delta P =3-4=-1 \\ E _{ d }=(-) \frac{\Delta Q }{ Q } \times \frac{ P }{\Delta P } \\ =(-) \frac{5}{5} \times \frac{4}{-1}=4 \\ E _{ d }=4 \text { or } E _{ d }>1\end{array}$
(2) i. Number of substitutes of goods: Demand for goods which have close substitutes (like tea and coffee) is relatively more elastic, because when the price of such a good rise, the consumers have the option of shifting to its substitute. Goods without close substitutes like cigarettes etc are generally found to be less elastic or inelastic in demand. Thus, the availability of close substitutes makes demand sensitive to change in prices.
ii. Nature of the commodity: Ordinarily, necessaries like salt, matchboxes, medicines etc have inelastic demand as it is required for human survival and its demand does not fluctuate much with a change in price. Luxuries, like air conditioner, costly furniture, car etc have more elastic demand as compared to the demand for comforts. Comforts like, cooler, fans etc have an elastic demand as consumers can postpone their consumption
| Price (Rs.) | Demand (units) |
| 4 (P) | 5 (Q) |
| 3 (P1) | 10 (Q1) |
(2) i. Number of substitutes of goods: Demand for goods which have close substitutes (like tea and coffee) is relatively more elastic, because when the price of such a good rise, the consumers have the option of shifting to its substitute. Goods without close substitutes like cigarettes etc are generally found to be less elastic or inelastic in demand. Thus, the availability of close substitutes makes demand sensitive to change in prices.
ii. Nature of the commodity: Ordinarily, necessaries like salt, matchboxes, medicines etc have inelastic demand as it is required for human survival and its demand does not fluctuate much with a change in price. Luxuries, like air conditioner, costly furniture, car etc have more elastic demand as compared to the demand for comforts. Comforts like, cooler, fans etc have an elastic demand as consumers can postpone their consumption