Subject: Economics

Name: Hosen Md Emran

Student ID: L202320028
Department: School of Economics and
Management
Major: Management Science and Engineering
(Master’s program 2023)

Course Teacher: Zhang Jianguang, Xiongfeng

School of Economics and Management
 (1) Define price elasticity of demand and income elasticity of demand?
Price Elasticity of Demand: Price elasticity of demand measures how sensitive the quantity
demanded of a good or service is to a change in its price. It is calculated as the percentage
change in quantity demanded divided by the percentage change in price. The formula for price
elasticity of demand (Ed) is:

% Change∈Quantity Demanded
Ey=
% Change∈Price

The result can be classified into different categories:

 If |Ed| > 1, demand is elastic (responsive to price changes).
 If |Ed| = 1, demand is unit elastic.
 If |Ed| < 1, demand is inelastic (insensitive to price changes).

Income Elasticity of Demand: Income elasticity of demand measures how sensitive the quantity
demanded of a good or service is to a change in consumer income. It is calculated as the
percentage change in quantity demanded divided by the percentage change in income. The
formula for income elasticity of demand (Ey) is:

% Change∈Quantity Demanded
Fy=
% Change∈ Income

The result can be classified into different categories:

 If Ey > 0, the good is a normal good (as income increases, demand increases).
 If Ey < 0, the good is an inferior good (as income increases, demand decreases).
 If Ey > 1, the good is a luxury good (demand is highly responsive to income changes).
These elasticity measures provide insights into how changes in price or income impact the
demand for a particular good or service.

(4) If the elasticity is greater than, is demand elastic or in elastic? If the elasticity is equal to
0, is demand perfectly elastic or inelastic?

Elasticity Greater Than 1: If the elasticity (whether price elasticity of demand or income
elasticity of demand) is greater than 1 in absolute value (|E| > 1), it indicates that the demand is
elastic. This means that the quantity demanded is relatively more responsive to changes in price
or income. In other words, a small percentage change in price or income leads to a relatively
larger percentage change in quantity demanded.
Elasticity Equal to 0: If the elasticity is equal to 0, it indicates a situation of perfect inelasticity.
This means that quantity demanded does not respond at all to changes in price or income. In the
case of price elasticity of demand, it implies that consumers are completely insensitive to
changes in price, and quantity demanded remains constant regardless of price changes. In the
case of income elasticity of demand, it implies that the quantity demanded does not change with
variations in income. Perfect inelasticity is a theoretical extreme and is not commonly observed
in real-world markets.

(7) What do we call a good whose income elasticity is less than 0?

A good whose income elasticity is less than 0 is referred to as an "inferior good." Inferior goods
are those for which demand decreases as consumer incomes rise. In other words, as people's
incomes increase, they tend to shift their consumption away from inferior goods toward more
desirable or higher-quality alternatives. This contrasts with normal goods, where demand
increases as incomes rise. Inferior goods often have cheaper substitutes that become more
attractive to consumers as they experience an increase in their purchasing power. Examples of
inferior goods might include certain generic or store-brand products, low-quality goods, or goods
associated with lower socioeconomic status.

The demand curve for an inferior good slope downward, signaling a reduction in the quantity
demanded as income levels increase. For instance, consider a scenario where a consumer
experiences an income increases from $100 to $200, and the demand for an inferior good drop
from 10 to 9 units.
The income elasticity of demand can be
Change∈quantity demand
¿
Change∈income
×100

In this case, the calculation results in -1, indicating an income elasticity of demand of -1. This
numerical value confirms the characterization of the good as inferior, aligning with the typical
behavior where demand diminishes with rising incomes.
 (9) What is the price elasticity of supply of Picasso paintings?

The price elasticity of supply for Picasso paintings, like many original works of art, is typically
low or inelastic. Price elasticity of supply measures how responsive the quantity supplied of a
good is to changes in price. In the case of unique and original works of art, such as Picasso
paintings, the supply is limited because each piece is one-of-a-kind.
Key factors contributing to the low-price elasticity of supply for Picasso paintings:
1. Unique and Irreplaceable: Original artworks, especially those created by renowned
artists like Picasso, are unique and irreplaceable. Each painting is a singular creation with
no identical substitutes.
2. Time-Consuming Production: Creating a painting, especially a masterpiece, is a time-
consuming process. Picasso, being a prolific artist, produced a considerable number of
works, but each one required a significant investment of time and skill.
3. Limited Quantity: The supply of original Picasso paintings is limited by the finite
number of works he created during his lifetime. Once a painting is sold or housed in a
museum or private collection, it is typically not available for sale again.
4. Market Dynamics: The art market operates differently from markets for mass-produced
goods. Prices for artworks, particularly those by renowned artists, are influenced by
factors beyond simple supply and demand, such as cultural significance, historical
context, and collector demand.
Due to these factors, changes in the market price for Picasso paintings are unlikely to lead to
significant changes in the quantity supplied, resulting in a low-price elasticity of supply.
Certainly! Let's calculate the price elasticity of demand for both business travelers and
vacationers using the midpoint method.

Part: Problem and applications

(2)
It provided a demand schedule for airline tickets from New York to Boston, showing the quantity
demanded by both business travelers and vacationers at different price levels. Here's a
breakdown of the information you've provided:
Price Business Travelers Vacationers
150 $ 2100 tickets 1000 Tickets
200$ 2000 tickets 800 Tickets
250$ 1900 tickets 600 Tickets
300$ 1800 tickets 400 Tickets

This table shows the quantity demanded by each group of travelers at different price points.
Typically, as the price of airline tickets decreases, the quantity demanded increases. This is a
basic economic principle known as the law of demand.
To calculate the price elasticity of demand using the midpoint method, you can use the following
formula:
Price Elasticity of Demand= % Change in Quantity Demanded/ % Change in Price

The formula for the percentage change is:

%Change = New Value - Old Value * 100

Midpoint Value

Let's calculate the price elasticity of demand for both business travelers and vacationers as the
price of tickets rises from $200 to $250:

Now, you can use these values in the price elasticity of demand formula for each group.

Given the data:

Price Levels:
 $200 (Initial Price)
 $250 (Final Price)
Quantity Demanded for Business Travelers:
 Initial Quantity (at $200): 2000 tickets
 Final Quantity (at $250): 1900 tickets
Quantity Demanded for Vacationers:
 Initial Quantity (at $200): 800 tickets
 Final Quantity (at $250): 600 tickets

Now, calculate the percentage change in quantity demanded and price for each group:
Now, plug these values into the price elasticity of demand formula:

Performing the calculations will give you the price elasticities of demand for both groups of
travelers.

7 NO QUESTION ANSWER:

The income elasticity of demand for good X is -3, indicating its inferior nature. A rise in income
leads to decreased demand for X, while a decrease in income results in increased demand. The
cross-price elasticity with substitute good Y is 2, suggesting substitutability. A higher price for Y
increases X's demand, with a 2% change in Y's price causing a 4% change in X's demand.
Whether an increase in income and a drop in Y's price would unequivocally reduce X's demand
depends on the balance between income and substitution effects. Typically, for an inferior good
like X, increased income lowers demand, while a lower price for a substitute (Y) tends to reduce
X's quantity demanded. In this case, increased income is likely to decrease X's demand, while a
lower price for Y would probably increase it. The precise impact on X's demand is uncertain
without further details on the magnitudes of income and substitution effects, given the
conflicting influences of income and price changes.

10 NO QUESTION ANSWER:

The provided data allows for an analysis of the price elasticity of demand for Tom and Jerry in
response to changes in gas prices. Tom's demand remains constant at 10 gallons, indicating an
inelastic, quantity-fixed demand with a price elasticity of demand of 0. This implies that
variations in price do not affect the quantity of gas he demands. On the contrary, Jerry's demand
is fixed based on price, consistently spending $10 on gas, reflecting an elastic, price-fixed
demand with an infinite price elasticity of demand. In Jerry's case, any change in gas price leads
to a significant change in the quantity demanded. To simplify, Tom's demand is considered
inelastic, while Jerry's demand is elastic, indicating that Jerry is more responsive to changes in
gas prices compared to Tom.

Interpretation:

Tom's Demand (Inelastic): Tom's demand is represented by a horizontal line, signifying a

constant quantity. With a price elasticity of demand of 0, his demand is inelastic, unresponsive to
price changes.

Jerry's Demand (Elastic): Jerry's demand is depicted by a vertical line, indicating fixed
expenditure. His price elasticity of demand is infinite, reflecting elastic demand, where quantity
demanded is highly responsive to price changes.

These visual representations illustrate the concepts of inelastic and elastic demand for Tom and
Jerry, respectively.

13 NO QUESTION ANSWER:

a. Technological advancements doubling the supply of pharmaceutical drugs and computers will
have distinct effects on the equilibrium price and quantity in each market:
 Pharmaceutical drugs (inelastic demand): The increased supply will push prices down, and
while the equilibrium quantity demanded will rise, the increase will be proportionally
smaller compared to the supply surge.
 Computers (elastic demand): The augmented supply will lead to a price decrease due to
the increased availability of computers. The equilibrium quantity demanded will
experience a substantial increase in response to the lower price, reflecting the elasticity of
demand for computers.

b. Computers will undergo a more pronounced change in price. As a product with elastic
demand, computers will experience a relatively larger price shift compared to pharmaceutical
drugs, which have an inelastic demand.

c. Computers will also witness a more significant change in quantity. The elastic demand for
computers means that the quantity demanded will increase substantially with the lower price
resulting from the supply boost. In contrast, the quantity of pharmaceutical drugs, with an
inelastic demand, will undergo a relatively smaller change.

d. The impact on total consumer spending for each product will manifest as follows:
 Pharmaceutical drugs: The inelastic demand implies that the price decrease from the
supply increase will not lead to a substantial increase in quantity demanded.
Consequently, total consumer spending on pharmaceutical drugs may either decrease or
remain relatively stable.
 Computers: The elastic demand suggests that the price reduction resulting from the
supply increase will lead to a notable increase in the quantity demanded. Therefore, total
consumer spending on computers is likely to rise as more consumers can afford to
purchase them at the lower price.