Question

1. Consider the market for ice-cream. Compare the price elasticity demand for ice cream in

(i) Winter vs (ii) Summer.

Show your answers in two graphs.

2. For the market for oranges, when price rises from $4 to $5, quantity demanded drops from 8 to 7.

(a) Calculate the price elasticity of demand.

(b) Is the demand for oranges elastic?

Answer 1

Price elasticity of demand shows the degree to which the quantity demanded for something changes ad its price changes. It is the ratio of percentage change in quantity demanded upon percentage change in its price. It is given by:

e_P = % change in quantity demanded / %change in price = ΔQ/Q * 100 / ΔP/P * 100 = (P/Q) * (ΔQ/ΔP)

The demand is elastic when the quantity demanded changes by large amount when the price changes and it is inelastic when quantity demanded changes by small amounts when its price changes. For elastic demand, 1 < e_P < ∞ and for inelastic demand, 0 < e_P < 1. Demand is perfectely elastic when e_P = ∞ and perfectely inelatic when e_P = 0. It is unitary elastic when e_P = 1.

(1) (i) In winters, people eat less ice-cream in general. So, if price of ice-cream increase in winters, people will choose not to buy ice-cream or buy less ice-cream. Thus, the demand for ice-creams is elastic in winters i.e. it is more responsive.

(ii) In summers, people eat more ice-cream as it is hot outside. So, if price of ice-cream increase in summers, people will still choose to buy more or less the same amount of ice-cream. Thus, the demand for ice-creams is inelastic in winters i.e. it is less responsive to changes in price.

They are shown below:

(2) (a) It is given that when price of oranges rises from $4 to $5, quantity demanded drops from 8 to 7. So,

ΔP = $5 - $4 = $1

and ΔQ = 7 - 8 = -1

and P = $4 , Q = 8

So, e_P = (P/Q) * (ΔQ/ΔP) = (4/8) * (-1/1) = -0.5

(b) Since the absolute value of price elasticity is e_P = 0.5 < 1, the demand for oranges is inelastic.