Question

1. What is meant by the price elasticity of demand? How is it calculated? What does this particular calculation tell us? Explain the difference between elastic and inelastic. Provide a real- life example of a good or service and describe whether or not demand for this particular good is elastic or inelastic.

2. Explain the concept of the price elasticity of supply. How is this key metric measured? Why is this meaningful? What factors impact the price elasticity of supply? Provide a detailed discussion.

3. When is demand perfectly inelastic? When is demand perfectly elastic? Explain the difference between these two terms. Provide examples. Describe the difference between a price effect and a quantity effect. Again, provide real-life examples in your discussion.

4. What are property rights? Why is this concept important? Give an example.

5. What is cross-price elasticity of demand? Why is this measurement helpful? What does this metric tell us?

Answer 1

Price elasticity of demand is the degree of responsiveness to the quantity demanded due to change in its price. Quantity of every good changes according to the changes in price. Price elasticity measures the degree of responsiveness of this change in quantity demanded due to change in price.

Price elasticity of demand is calculated or measured by finding out the percentage change in quantity demanded due to the percentage change in price.That is,

E(p)=% change in quantity demanded ÷% change in price.

Formula to find out price elasticity of demand is

e(p)=dQ/Q÷dP/P where

e(p) = price elasticity of demand,

Q= quantity demanded of a good,

P= price of the demanded good.

This calculation of price elasticity of demand tells us that whether the good is elastic or inelastic or unitary elastic in demand. That is if price elasticity of demand equals to zero the good has inelastic demand and if the price elasticity of demand greater than 1 the good has elastic demand and if the price elasticity of demand equals 1 the good has unitary elastic demand.  

For instance in our daily life , we can say that the price of luxury goods like gold and diamond are elastic because a change in the price of gold and diamond causes fluctuations in demand.

That means if the price of Gold and Diamonds dicreases the quantity demanded of gold and diamond will increase soon. So gold and diamond is a best example for elastic good.

Now take the case of inelastic demand, in our daily life goods which are necessity has inelastic demand. Say for example take the case of petrol. The demand for petrol is inelastic because it is a necessity. We could not avoid or defer purchasing of petrol because of a rise in price of petrol. So whatever may be the rise in price we must purchase some amount of petrol. So the demand for petrol is inelastic.