Question

1. Distinguish between elastic and inelastic demand and provide a real world example for each. Also what are the extreme cases of perfectly inelastic demand and perfectly elastic demand?

2. Among the price elasticity, income elasticity and cross price elasticity where the negatives signs are ignored? This means that absolute values are taken into account.

Answer 1

1. Distinguish between elastic and inelastic demand and provide a real-world example for each. Also, what are the extreme cases of perfectly inelastic demand and perfectly elastic demand?

The elasticity of demand refers to the degree of responsiveness of quantity demanded of a good to a change in its price, consumers’ income and prices of related goods.

Elastic demand: when the percentage change in quantity demanded is greater than the change in price, the price elasticity of demand will be greater than 1 and in this case, the demand is said to be elastic.

Inelastic demand: when a percentage change in the price of a commodity leads to a smaller percentage change in quantity demanded, elasticity will be less than one and demand is said to be inelastic.

Extreme cases of perfectly inelastic demand and perfectly elastic demand

There are two extreme cases of price elasticity of demand such as perfectly inelastic demand of demand and perfectly elastic demand. In case of perfectly inelastic demand, the price of a commodity does not affect the quantity demand of the commodity at all and the demand curve will be a vertical straight line. For example-Medicine, Salt etc.

In case of perfectly elastic demand, the demand curve will be a horizontal straight line. It occurs when there is an infinite change in quantity demanded without a change in price. This kind of behaviour is not found in the real world, it is quite imaginary.

Diagram:

2. Among the price elasticity, income elasticity and cross-price elasticity where the negatives signs are ignored? This means that absolute values are taken into account.

In economics, price elasticity expressed with a positive sign despite the fact that change in price and changes in quantity demanded are inversely related to each other because we are focussed on measuring the magnitude of responsiveness of quantity demanded of a good to a change in its price. But in the case of cross-elasticity of demand, the signs are considered to categorise the types of goods that the consumer consumes. Therefore, in the case of price elasticity, the income elasticity of demand the signs are ignored and only value of the elasticity is taken into consideration.

If income elasticity > 0 then luxury goods

If income elasticity < 0 then Necessary goods or inferior goods depending upon the fall in consumption.

If cross elasticity of demand is +ve then X and Y are substitutes

If cross elasticity of demand is -ve then X and Y are complementary