Economics · Unit 2
Demand and Elasticity
Exam-focused notes for Demand and Elasticity (Economics, ECO155): what the TU syllabus asks and how it has actually been tested, with 11 solved past questions from this unit.
What this unit covers
- Definition of demand and demand schedule
- Determinants of demand
- Price elasticity of demand definition and types
- Price elasticity measurement by percentage method
- Price elasticity measurement by arc method
- Relationship between total expenditure and price elasticity
- Income elasticity of demand and types
- Cross elasticity of demand
Price elasticity measurement by percentage method
Question
Given the demand schedule:
| Price (Rs.) | 25 | 20 | 15 | 10 | 5 |
|---|---|---|---|---|---|
| Quantity Demanded | 50 | 100 | 150 | 200 | 250 |
a) Calculate the price elasticity of demand from point Rs. 20 to Rs. 15 using the point method.
b) Compute the arc elasticity of demand between points Rs. 15 and Rs. 10. [5+0+0]
Price (Rs.) 25 20 15 10 5 ------------------ Quantity Demanded 50 100 150 200 250 --- Formula (Point Method): $$Ed = \frac{\Delta Q}{\Delta P} \times \frac{P}{Q}$$ Data: - Initial point: $P = 20$, $Q = 100$ - New point: $P = 15$, $Q = 150$ Working: $$\Delta...
Full solved answer →Price Elasticity of Demand Analysis
Relevant points from the table: Combination A C --------- Price (Rs.) 7 5 Quantity (Units) 500 1250 --- Using base values at point A ($P1 = 7$, $Q1 = 500$): $$Ed = \frac{\Delta Q}{\Delta P} \times \frac{P1}{Q1}$$ - $\Delta Q = 1250 - 500 = 750$ - $\Delta P ...
Full solved answer →Price Elasticity of Demand
Given the Price demand schedule below. Find the price elasticity of demand when price changes from 40 to 20 and 20 to 40 by percentage method and also compare the results between them.
| Price | 50 | 40 | 30 | 20 | 10 | 0 |
|---|---|---|---|---|---|---|
| Quantity Demand | 5 | 10 | 15 | 20 | 25 | 30 |
[5]
Price 50 40 30 20 10 0 ------------------------------- Quantity Demanded 5 10 15 20 25 30 Points of interest: - At $P = 40$, $Q = 10$ - At $P = 20$, $Q = 20$ $$Ed = \frac{\% \text{ change in Quantity Demanded}}{\% \text{ change in Price}} = \frac{\Delta Q /...
Full solved answer →Price elasticity measurement by arc method
How price elasticity is measured by arc method? Explain. [5]
The arc method (also called the midpoint method) measures price elasticity of demand over a range or arc of the demand curve, rather than at a single point. It provides a more accurate elasticity measurement when there is a significant change in price and q...
Full solved answer →Price Elasticity of Demand Problem
Suppose a demand schedule is given as below:
| Price | 100 | 80 | 60 | 40 | 20 | 0 |
|---|---|---|---|---|---|---|
| Quantity Demanded | 100 | 200 | 300 | 400 | 500 | 600 |
a. Calculate elasticity for fall in price from Rs. 80 to Rs. 60.
b. Calculate elasticity for the increase in price from Rs. 60 to Rs. 80.
c. Why is the elasticity coefficient in part a) different from that in b)?
[5]
Price (Rs.) 100 80 60 40 20 0 --------------------- Quantity Demanded 100 200 300 400 500 600 Relevant points: - At $P = 80$, $Q = 200$ - At $P = 60$, $Q = 300$ The question asks separately for elasticity of a fall (80 → 60) and a rise (60 → 80), and then a...
Full solved answer →Income elasticity of demand and types
Income Elasticity of Demand
Combination A B C D E ------------------ Income (Rs) 0 2 4 6 8 Demand (Units) 200 160 120 80 40 Points of interest: - Point B: $Y = 2$, $Q = 160$ - Point C: $Y = 4$, $Q = 120$ --- Formula: $$Ey = \frac{\Delta Q}{\Delta Y} \times \frac{Y}{Q}$$ $$\Delta Q = 1...
Full solved answer →Define income elasticity of demand. Describe the various types of income elasticity of demand with suitable diagrams.[10]
Income Elasticity of Demand (YED) measures the responsiveness or sensitivity of quantity demanded of a good to changes in consumer income. It shows the percentage change in quantity demanded resulting from a one percent change in consumer income. Formula: $...
Full solved answer →Price elasticity of demand definition and types
Define price elasticity of demand. Discuss the various types of price elasticity of demand with diagrams.[10]
Price Elasticity of Demand (PED) is a measure of the responsiveness or sensitivity of the quantity demanded of a good to changes in its price. It quantifies the percentage change in quantity demanded relative to the percentage change in price. Formula: $$PE...
Full solved answer →Question
Consider the following table:
| Combinations | A | B | C | D | E | F | G |
|---|---|---|---|---|---|---|---|
| Price (Rs.) | 6 | 5 | 4 | 3 | 2 | 1 | 0 |
| Demand (Units) | 0 | 1000 | 2000 | 3000 | 4000 | 5000 | 6000 |
a) Find the price elasticity of demand for movement from points B to D and D to B by proportional method.
b) Compute the price elasticity of demand at the mid way between A to C and C to A by arc method. [5+0]
Combination A B C D E F G ------------------------ Price (Rs.) 6 5 4 3 2 1 0 Demand (Units) 0 1000 2000 3000 4000 5000 6000 Points of interest: - B: $P = 5$, $Q = 1000$ - D: $P = 3$, $Q = 3000$ - A: $P = 6$, $Q = 0$ - C: $P = 4$, $Q = 2000$ --- The proporti...
Full solved answer →Determinants of demand
Describe the major determinants of demand. [5]
The major determinants of demand are the factors that influence the quantity of a good or service that consumers are willing and able to purchase at various price levels. The key determinants are: The most fundamental determinant. There is an inverse relati...
Full solved answer →Relationship between total expenditure and price elasticity
Define elasticity of demand. Discuss the relationship between total expenditure and price elasticity of demand.[10]
Elasticity of demand measures the responsiveness or sensitivity of the quantity demanded of a good to changes in its price. It quantifies how much the quantity demanded changes in response to a percentage change in price. Mathematically, price elasticity of...
Full solved answer →Make Unit 2 stick
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