Question

Please answer all

1. What are the differences between elastic, inelastic, unitary elastic, perfectly elastic, and perfectly inelastic?

2. What is the relationship and significance of price elasticity of demand to total expenditures by consumers and total revenue by firms?

3. How does the price elasticity of demand relate to the burden of a tax, consumer surplus, and producer surplus?

Answer 1

1. The elasticity of Demand measures the extent to which quantity demanded of a commodity increase or decrease in response to increase or decrease in any of its quantitative determinants. The elasticity of demand measures the responsiveness of the quantity demanded of a good, to change in its price, price of other goods and change in consumer's income.

When % change in quantity demanded > % change in price then demand is elastic.

When % change in quantity demanded = % change in price then demand is unitary elastic.

When % change in quantity demanded < % change in price then demand is inelastic.

When change in price does not have any effect on quantity demand then demand is said to be perfectly inelastic.

When minor increase in price causes quantity demanded to zero then it meand demand is perfectly elastic.

2. Relationship between Ed and Total expenditure by consumers;

a) When decrease in price causes no change in total expenditure of consumer then Ed = 1.

b) When decrease in price causes increase in total expenditure of consumer then Ed > 1.

c) When decrease in price causes decrease in total expenditure of consumer then Ed < 1.

Relationship between Ed and total revenue of firm:

a) When demand is elastic and price rises then total revenue of firm decreases.

b) When demand is elastic and price falls then total revenue of firm inreases.

c) When demand is inelastic and price rises then total revenue of firm increases.

d) When demand is inelastic and price falls then total revenue of firm decreases.