Concept of Elasticity Application and Problem solving 2 A 10

Concept of Elasticity Application and Problem solving: 2. A 10 percent increase in the price of a good has led t o a 2 percent decrease in the quantity demanded of that good. 1. How would you describe the demand for this good? 2. Are substitutes for this good easy to find or does it have poor substitutes? 3. Is this good more likely to be a necessity or a luxury? Why? 4. Calculate the price elasticity of demand for this good. 5. Has the total revenue from the sale of the good changed? Explain your answer. 6. This good might be which of the following goods: orange juice, bread, tooth-paste, theatre tickets, I phone, blue jeans, and super bowl tickets? Why? Page 2

Solution

We know, elasticity= (percentage change in quantity demanded / percentage change in price)

For the good, elasticity = 2/10 = 1/5 = 0.2

1. The demand for this good is price inelastic as the value of elasticity is less than 1.

2. Goods which have substitute that are easy to find, are elastic in nature because, availability of substitute makes consumers of the good more price sensitive. However, goods which are inelastic in nature means they have poor substitute or substitute that can\'t be easily found. So, people are less price sensitive as even if price increases, they have to consume the good as there are less substitute available.

Answer- poor substitute available

3. Goods which are luxury in nature are more price sensitive and therefore demand for these goods are price Elastic. However goods which have inelastic demand, they are necessity goods because in case of necessary good even if price changes by large amount consumers have no option but to buy it(as the good is necessary), means quantity demanded changes by smaller amount making the demand price inelastic.

Answer- Necessity good

4. Price elasticity of demand for the good is 0.2 (calculated before).