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Old Sunday, March 23, 2014
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Default Economics questions :(

a) Why the price elasticity of salt is low and price elasticity of Toyota car is high?
b) Why the magnitude of elasticity different at each and every point of demand curve?
c) What is the cross elasticity of demand if two commodities are substitute and if two commodities are compliment of each other?
d) What is the distinction between inferior goods and normal goods and between an extension in demand and rise in demand?
e) Why is the demand for durable goods less stable then the demand for non durable goods?
f) What is the advantage for using price elasticity rather than the slope of the demand curve or its inverse to measure the responsiveness in the quantity demanded of a commodity to a change in its price?
g) Why and how is the formula for arc price elasticity of demand different from the formula for point price elasticity of demand?
h) State the relationship between the total revenue of firm and price elasticity of demand for price increase along a linear demand curve , and also explain the reason of the relationship
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Old Saturday, May 31, 2014
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Originally Posted by olivejuice587 View Post
a) Why the price elasticity of salt is low and price elasticity of Toyota car is high?
b) Why the magnitude of elasticity different at each and every point of demand curve?
c) What is the cross elasticity of demand if two commodities are substitute and if two commodities are compliment of each other?
d) What is the distinction between inferior goods and normal goods and between an extension in demand and rise in demand?
e) Why is the demand for durable goods less stable then the demand for non durable goods?
f) What is the advantage for using price elasticity rather than the slope of the demand curve or its inverse to measure the responsiveness in the quantity demanded of a commodity to a change in its price?
g) Why and how is the formula for arc price elasticity of demand different from the formula for point price elasticity of demand?
h) State the relationship between the total revenue of firm and price elasticity of demand for price increase along a linear demand curve , and also explain the reason of the relationship
a) Why the price elasticity of salt is low and price elasticity of Toyota car is high?
1st of all you see that what is price elasticity. it is the % change in quantity demanded due to % change in price. now consider that you have an approximately fixed demand for salt because if price of salt decreases, you will not start using more salt in your food. your usage of salt will remain the same even after price change. it means quantity demanded of salt has not changed due to change in price (or if it changes, then this change is very very minimal), that is why price elasticity of salt is very low.
now come to case of toyota car. if price of toyota decreases, its sales will certaily increase by a large number. similarly if its price increases, its sales will decrease by a large number. it shows that sales of toyota are more sensitive to price change because even a small change in price brings a large change in volume of sales of toyota. so toyota car's price elasticity is high.

b) Why the magnitude of elasticity different at each and every point of demand curve?
this is because at each point of demand curve, price change is creating a different effect on quantity demanded. suppose initially the prices are very low (we are at lower end of demand curve). we know that when prices are low, demand for that commodity is high. so an increase in price will not create a proportionate decrease in demand (because demand is high). hence demand is less elastic.
when prices are very high, demand is already very low (we are at upper part of demand curve). so any further increase in price will create proportionately larger decrease in demand. here demand is more elastic.
and that portion of demand curve where an increase in price is creating proportionately equal decrease in demand is unit elastic.

c) What is the cross elasticity of demand if two commodities are substitute and if two commodities are compliment of each other?
if two commodities are substitutes, they can be used in place of each other. so if price of one commodity increase, its demand will decrease, and demand for other commodity will increase. it means cross price elasticity of substitutes is positive.
if two commodities are complements, they must be used together. so if price of one commodity increases, its demand will decrease, so the demand for its complement will also decrease. hence cross price elasticity of complements is negative.

d) What is the distinction between inferior goods and normal goods and between an extension in demand and rise in demand?
normal good means that commodity whose demand decreases due to increase in price. while giffen good is that commodity whose demand increases along with increase in price. e.g. bread. if price of bread increases, one cannot reduce consumption of bread because it is necessary for one's survival. so one will reduce other expenditures to spend more of one's income on bread. it means when the price of bread increases, one has to spend a larger share of his income on it. so bread is a giffen commodity.
extension in demand means increase in demand along the demand curve (due to decrease in price). while rise in demand means shift in demand curve i.e. increase in demand due to factors other than price.

e) Why is the demand for durable goods less stable then the demand for non durable goods?
durable goods are those commodities which have a long life after production e.g. buildings, television, machinery etc. while non durable goods are those commodities which are consumed within a short time span after their production e.g. food items, gasoline, petrol etc.
demand for non durable goods is more stable because one has to buy these items again and again. so an increase in price of non durable goods doesn't decrease its demand by proportionate amount because one cannot stop their consumption at all. while demand for durables is less stable because an increase in their price will create a proportionately larger decrease in their demand.

g) Why and how is the formula for arc price elasticity of demand different from the formula for point price elasticity of demand?
measurement of elasticity on one point of demand curve is called point elasticity. when there are very minor changes in demand due to price, two points on demand curve are so close to each other that their separate identity doesn't exist, so we take them as a single point and find point elasticity there. its formula is (dQ/dP) * (P/Q)
when there are large changes in price and quantity demanded, there are two distinct points on demand curve. measurement of elasticity between two points is called arc elasticity. arc elasticity is average elasticity. its formula is (dQ/dP) * [(P1+P2) / (Q1+Q2)]
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