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Elasticity of demand - Microeconomics
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FAQs on Elasticity of demand - Microeconomics
| 1. What's the difference between price elasticity of demand and income elasticity of demand? |  |
Ans. Price elasticity of demand measures how quantity demanded changes when price changes, while income elasticity of demand shows how quantity demanded responds to changes in consumer income. Price elasticity focuses on affordability shifts, whereas income elasticity reveals whether a good is normal or inferior based on purchasing power changes.
| 2. How do I calculate price elasticity of demand using the percentage change method? | |
Ans. Price elasticity of demand equals the percentage change in quantity demanded divided by the percentage change in price. Use this formula: (Change in Quantity ÷ Original Quantity) ÷ (Change in Price ÷ Original Price). The result's absolute value indicates elasticity-values above 1 show elastic demand, below 1 show inelastic demand, and equal to 1 show unit elastic demand.
| 3. Why do some products have elastic demand while others have inelastic demand? | |
Ans. Demand elasticity depends on availability of substitutes, necessity versus luxury classification, and budget proportion. Essential goods like salt have inelastic demand because consumers buy similar quantities regardless of price. Luxury items with many alternatives show elastic demand since price increases cause significant quantity reductions as buyers switch to substitutes.
| 4. What does it mean when demand is perfectly elastic or perfectly inelastic? | |
Ans. Perfectly elastic demand (infinite elasticity) occurs when any price increase causes quantity demanded to drop to zero-consumers abandon the product entirely. Perfectly inelastic demand (zero elasticity) means quantity demanded remains constant regardless of price changes. Real-world examples are rare; perfectly elastic applies to identical commodities in competitive markets, while perfectly inelastic approaches essential medicines without alternatives.
| 5. How can I use elasticity concepts to understand why some goods stay affordable while others become luxury items? | |
Ans. Elasticity determines pricing strategy and consumer behaviour patterns. Goods with inelastic demand-like basic food items-maintain affordability because producers cannot raise prices significantly without losing revenue. Goods with elastic demand face competitive pressure, keeping prices lower. Understanding cross elasticity of demand helps explain how substitute goods influence each other's pricing, affecting what becomes accessible or exclusive in markets.
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