Q. Explain the five degrees of elasticity of demand?
Methods of Measuring Price Elasticity of Demand:-
Proportionate / Percentage Method:
Q. The Price of ice cream is Rs.20 per cup and demand is for 200 cup. If the price of ice cream falls to Rs.15 demand increases to 300 cups. Calculate elasticity of demand.
Total Outlay Method (Expenditure Method)
If with the fall in price, total outlay increases elasticity of demand is greater than one, if total outlay remain constant, elasticity is equal to one and if the total outlay decreases elasticity is less than one.
Geometric / Point Method: -
This measures the elasticity of demand at different points on the same demand Curve.
ONE MARK QUESTIONS AND ANSWERS
1. What do you mean by utility?
Ans :- Utility is the want satisfying power of a commodity.
2. How is total utility derived from marginal utility?
Ans :- Total utility is the sum total of marginal utilities of various units of a commodity.
TUn= MU1+MU2+MU3------ +MUn
3. State the law of equi-marginal utility.
Ans :- It states that a consumer gets maximum satisfaction when the ratio of the marginal utilities of two goods and their prices is equal i.e., MUx / Px = MUy / Py
4. What will you say about MU when TU is maximum?
Ans :- MU is zero when TU is maximum
5. Give the reason behind a convex indifference curve.
Ans :- Diminishing marginal rate of substitution.
3 AND 4 MARKS QUESTIONS & ANSWERS
Ans: - The law of diminishing Marginal Utility states that as we consume more and more units of a commodity, the MU derived from the successive units of that commodity goes on decreasing. It is explained with the help of following schedule and diagram.
Relationship between MU and TU :
i) When MU is positive TU rises.
ii) When MU is zero TU is maximum.
iii) When MU is negative, TU falls.
6. Explain any four factors that affect elasticity of demand.
Ans :- Following are the factors affecting price elasticity of demand.
Availability of close substitutes: If close substitutes of product are available, the commodity tends to be more elastic, If there are not available, they tend to be less elastic.
Proportion of total expenditure spent on the product-If the amount spent on a product constitutes a very small fraction of the total expenditure, then the demand tends to be less elastic of the amount spent is high the elasticity of demand tends to be high.
Habits: A commodity if it forms an essential part of the individual, the demand tends to be inelastic. It is consumed casually; the demand tends to be elastic
Time period :- Longer the time period, the more elastic is the demand for any product the shorter the time period, less elastic is the demand for any products