Question

(a) Explain what it means when a good has an inelastic price elasticity of demand. (b) Explain what it means when a good has an elastic price elasticity of demand.

(a) What are the various magnitudes of elasticity? (b) How does quantity demanded change relative to price when there is a change in price for each point on the spectrum?

Answer 1

(a) Inelastic price elasticity of demand means that when price of a good rises (falls) by P%, its quantity demanded falls (rises) by less than P%, therefore absolute value of elasticiy is less than 1. In this case, a rise (fall) in price will increase (decrease) total revenue.

(b) Elastic price elasticity of demand means that when price of a good rises (falls) by P%, its quantity demanded falls (rises) by more than P%, therefore absolute value of elasticiy is more than 1. In this case, a rise (fall) in price will decrease (increase) total revenue.

(c) Elasticity (Ep) may have the following ranges of values:

(i) |Ep| = Infinity (Demand is perfectly elastic)

(ii) Infinity < |Ep| < 1 (Demand is elastic)

(iii) |Ep| = 1 (Demand is unit elastic)

(iv) 1 > |Ep| > 0 (Demand is inelastic)

(v) |Ep| = 0 (Demand is perfectly inelastic)

(d) Ep = % Change in quantity demanded (Qd) / % Change in price

(i) When demand is perfectly elastic, a P% Change in price changes Qd infinitely, in opposite direction.

(ii) When demand is elastic, % Change in quantity demanded (Qd) > % Change in price

(iii) When demand is unit elastic, % Change in quantity demanded (Qd) = % Change in price

(iv) When demand is inelastic, % Change in quantity demanded (Qd) < % Change in price

(v) When demand is perfectly inelastic, Qd does not change at all with a change in price.