Professional Documents
Culture Documents
Price Elasticity of Demand (PED) measures the responsiveness of quantity demanded to changes
in price. In the case of perfect inelasticity, PED is zero because there is no change in quantity
demanded when the price changes. Charles's PED for Mello Yello is 0, indicating a perfectly
inelastic demand.
Q. 10
a. Oranges or Sunkist oranges:
Sunkist oranges are a specific brand of oranges. If the prices of Sunkist oranges rise
significantly, consumers can easily switch to generic or other brands of oranges, making the
demand for Sunkist oranges more elastic.
b. Cars or salt:
Cars are typically considered a more expensive and significant purchase, so their demand tends
to be relatively elastic. On the other hand, salt is a basic and inexpensive commodity with few
substitutes, making its demand more inelastic.
c. Foreign travel in the short run or foreign travel in the long run:
In the short run, travel plans are often more inflexible due to factors like booking restrictions and
limited alternatives, so the demand for foreign travel in the short run tends to be less elastic. In
the long run, consumers have more flexibility and can adjust their travel plans more easily,
making the demand for foreign travel in the long run more elastic.
In each of these pairs, the goods with more available substitutes or those that are considered less
essential tend to have higher price elasticity of demand. Therefore:
a. Oranges or Sunkist oranges - Sunkist oranges likely have a higher price elasticity of
demand.
b. Cars or salt - Salt likely has a lower price elasticity of demand.
c. Foreign travel in the short run or foreign travel in the long run - Foreign travel in the long
run likely has a higher price elasticity of demand.
Q.11
The income elasticity of demand measures how sensitive the quantity demanded of a good or
service is to changes in consumer income. Specifically:
If the income elasticity of demand is greater than 1 (elastic), it indicates that the good is a luxury,
and as consumer income increases, the demand for the good increases by a greater percentage.
If the income elasticity of demand is between 0 and 1 (inelastic), it indicates that the good is a
necessity, and as consumer income increases, the demand for the good increases, but by a
smaller percentage.Now, let's consider the impact of a recession that reduces consumers' incomes
by 10 percent on the demand for furniture and physician services based on their respective
income elasticities
Furniture (Income Elasticity = 3.0):
With an income elasticity of 3.0, furniture is considered a luxury good.When consumers'
incomes decrease by 10 percent due to the recession, the demand for furniture is expected to
decrease, but the decrease will be relatively larger (more than proportionate) because the income
elasticity is greater than 1.So, the demand for furniture is likely to decrease by more than 10
percent.
Physician Services (Income Elasticity = 0.3):
With an income elasticity of 0.3, physician services are considered a necessity.When consumers'
incomes decrease by 10 percent due to the recession, the demand for physician services is
expected to decrease, but the decrease will be relatively smaller (less than proportionate) because
the income elasticity is less than 1.So, the demand for physician services is likely to decrease by
less than 10 percent.