Question

(a) The price elasticity of demand for smoke grinders in response to changes in the price of purpletts is -2. What formula and concept will we use to study the change in quantity demanded of smoke grinders to a change in price of purpletts? What the -2 elasticity of demand tells us about the goods purpletts and smoke grinders? (b) Given the table below, answer the following question. The quantity demanded of which good decreases the most during a recession (when incomes decrease)?

Given the table below ( income elasticity of demand), answer the following question.

Total brand cereal = 0.3, eclipse galsses = -1.5, office chairs = 0, theater tickets = 4, heart shaped pillows = 2

The quantity demanded of which good decreases the most during a recession (when incomes decrease)?

Answer 1

a) The change in the quantity demand for smoke grinders in response to the changes in the price of purpletts can be explained with the concept of 'Cross price elasticity of demand'.

The cross price elasticity of demand of a commodity can be defined as the percentage change in the quantity demand for that commodity in response to the percentage change in the price of other commodity.

Cross price elasticity = % change in the quantity demand of a commodity / % change in the price of other commodity.

It can be calculated as follows.

change in the quantity demanded of a commodity

change in the price of other commodity

P= initial price

Q= initial quantity demanded.

If the cross price elasticity is negative, the two products are complementary. ie, when the price of a commodity decreases, the quantity demand of other commodity will increase and vice versa.

If the price elasticity is positive, the two products are substitutes. ie, the when the price if of a commodity increases, the quantity demand for other commodity will also rise and vice versa

So the -2 price elasticity of demand for smoke grinders means that the smoke grinders and purpletts are complementary products. Since the elasticity is greater than one, %change in the quantity demanded of smoke grinders will be greater than the %change in the price of purpletts.

b) The income elasticity of demand for a commodity can be defined as the percentage change in the quantity demand of a commodity in response to the percentage change in the income.

The demand for a commodity is elastic, if the income elasticity is greater than one. ie, the %change in quantity demand is greater than the %change in the income.

The demand for a commodity is inelastic, if the income elasticity is less than one. ie, the %change in the quantity demand is less than the %change in income.

Income elasticity is 1 when the % change income leads to a equal %change in the quantity demanded.

When income decreases, the quantity demand of the theater tickets will decrease the most. Because it has higher elastic demand equal to 4.

Total brand cereal has inelastic demand 0.3.

Eclipse glasses has a negative income elasticity, ie, when income decreases the quantity demand increse and vice versa.

Office chair has unitary elastic demand.change in income brings equal change in demand

Heart shaped pillow has elastic demand but it is less than the elasticityvof theater tickets.

So when income decreases, the quantity demand of theater tickets will decrease the most.