MICROECONOMICS WEEK 5

Fill in the blanks to make the following statements correct:

When a 10% change in the price of a good brings about a 20% change in the
quantity demanded, the price elasticity of demand is _____2______.
We can say that demand for this good is ___elastic____.
b. When a 10% change in the price of a good brings about a 4% change in the
quantity demanded, the price elasticity of demand is ____0.4_____.
We can say that demand for this good is ____inelastic_____.
c. When a 10% change in the price of a good brings about a 10% change in the
quantity demanded, the price elasticity of demand is _____1______.
We can say that demand for this good is ____unit elastic_____.
A demand schedule for Honda Dream motorbikes in Phnom Tamao village is
shown below. a. Fill in the table and calculate the price elasticity of demand
over each price range.

Price Q demand Total %change in %change in Elasticity of

Expenditure price Q demand demand
1100 1 1100 0 0

900 3 2700 20 100 5

700 5 3500 25 50 2

500 7 3500 33 33 1

300 9 2700 50 25 0.5

100 11 1100 100 20 0.2

b. Plot the demand curve and show the elasticities over different areas of
the curve
c. Why is demand more elastic at higher prices?
Because of the more discretionary a purchase is the more its quantity will fall in
response to make price rises.
3. Do you think the following goods would be relatively elastic or
relatively inelastic (in terms of price elasticity of demand)?
-Rice is relatively inelastic because people need rice to survive their
lives, especially in Asia country.
-Beef is relatively elastic because there is substitute between beef
such as chicken, pork, fish.
-Vegetables is relatively inelastic for some regions and country.
-Petrol (gasoline) is relatively inelastic people need to travel every
day.
4. For each of the following events, state the elasticity concept and compute the
measure of elasticity that is appropriate.
a.When the price of movie tickets is reduced from 6000R to 4000R, ticket sales
increase from 300 to 600.
%Change in price = 4000-6000/4000+6000/2= 40%
%Change in demand = 600-300/600+300/2= 67%
Ped=67/40=1.675
The demand for this good is elastic (PED>1).
b.As average household income increases by 20%, annual sales of Toyota
Camrys increase from 2000 to 2500.
%Change in price = 20%
%Change in demand = 25000-2000/2500+2000/2 = 22%
Ped= 22/10 = 1.1
The demand for this good is elastic (PED>1).
c.After a lack of rain in Vietnam, coffee prices increase from 6000R/kg to
8000R/kg, sales of tea increase from 1200kg to 16000kg per month.
%Change in price = 8000-6000/8000+6000/2 = 28%
%Change in demand = 16000-1200/16000+1200/2 = 172%
Ped= 172/29 = 5.93
The demand for this good is elastic (PED>1).