Worksheet Solutions: Theory of Consumer Behaviour - 2 | Economics Class 11 - Commerce PDF Download

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Q1: Elasticity of demand measures the ______________ of demand due to changes in price.
Ans:  Price
Elasticity helps assess how changes in price affect consumer demand and, consequently, the total revenue of firms.

Q2: Price elasticity of demand (ED) is the degree of responsiveness of demand to changes in its _______________.
Ans: Quantity demanded
It measures how much the quantity demanded changes in response to changes in the price of a good.

Q3: Marshall defined price elasticity of demand as the percentage change in demand due to the percentage change in ____________.
Ans: Outlay
This definition highlights the relationship between price changes and consumer expenditure.

Q4: Perfectly inelastic demand (ED = 0) occurs when the quantity demanded doesn't change with changes in the price of the __________.
Ans: Percentage
 In this case, consumers continue to buy the same quantity regardless of price changes.

Q5: Perfectly elastic demand (ED = ∞) occurs when demand changes infinitely without a change in price, existing under ___________ competition.
Ans: Flatter
This rarely occurs in the real world and is associated with highly substitutable goods in a competitive market.

Q6: In the total expenditure method, when elasticity is greater than 1, it indicates __________ demand.
Ans: Price
This means that when the price changes, the total expenditure (total spending) on the good changes in the opposite direction.

Q7: Availability of close substitutes makes demand more ____________.
Ans: Inelastic
When close substitutes are available, consumers can easily switch to other goods with similar characteristics, making them less responsive to price changes.

Q8: Complementary goods have ____________ demand, as their demand is joint.
Ans: Elastic
When the price of one complementary good changes, it affects the demand for the other, leading to relatively large changes in demand.

Q9: When price level is low, articles tend to have __________ demand.
Ans: Perfectly inelastic
This means that consumers will buy the same quantity regardless of price because these items are considered essential.

Q10: In the case of a longer time period, demand tends to become more ____________.
Ans: Elastic
Over a longer period, consumers may have more time to adjust their preferences and habits, making them more responsive to price changes.

Assertion and Reason Based

Q1: Assertion: Elasticity of demand measures the responsiveness of demand due to changes in price.
Reason: Price elasticity of demand (ED) measures the change in price due to a change in demand.
(a) Both assertion and reason are correct, and the reason is the correct explanation of the assertion.
(b) Both assertion and reason are correct, but the reason is not the correct explanation of the assertion.
(c) Assertion is correct, but the reason is incorrect.
(d) Assertion is incorrect, but the reason is correct.
Ans: (a)
Price elasticity of demand indeed measures responsiveness to price changes, and it is calculated by comparing the percentage changes in quantity demanded and price.

Q2: Assertion: Perfectly elastic demand (ED = ∞) occurs when demand changes infinitely without any change in price.
Reason: It exists under perfect competition.
(a) Both assertion and reason are correct, and the reason is the correct explanation of the assertion.
(b) Both assertion and reason are correct, but the reason is not the correct explanation of the assertion.
(c) Assertion is correct, but the reason is incorrect.
(d) Assertion is incorrect, but the reason is correct.
Ans: (a)
Perfectly inelastic demand means the quantity demanded doesn't change with price, and in this scenario, demand becomes zero with a small price increase.

Q3: Assertion: Availability of close substitutes makes demand more elastic.
Reason: Close substitutes provide consumers with alternatives, making them more responsive to price changes.
(a) Both assertion and reason are correct, and the reason is the correct explanation of the assertion.
(b) Both assertion and reason are correct, but the reason is not the correct explanation of the assertion.
(c) Assertion is correct, but the reason is incorrect.
(d) Assertion is incorrect, but the reason is correct.
Ans: (a)
Elasticity being a unit-free measure is a significant feature as it is expressed in percentage terms and is independent of the choice of units for quantity and price.

Q4: Assertion: In the total expenditure method, when elasticity is greater than 1, it indicates elastic demand.
Reason: Elastic demand means that consumers respond significantly to price changes.
(a) Both assertion and reason are correct, and the reason is the correct explanation of the assertion.
(b) Both assertion and reason are correct, but the reason is not the correct explanation of the assertion.
(c) Assertion is correct, but the reason is incorrect.
(d) Assertion is incorrect, but the reason is correct.
Ans: (a)
The assertion is correct; however, the reason does not correctly explain it. In the Point/Straight Line Demand Curve method, the curve touching the X-axis is perfectly inelastic, not perfectly elastic.

Q5: Assertion: When price level is low, articles tend to have inelastic demand.
Reason: Inelastic demand means that small price changes do not significantly impact consumer budgets.
(a) Both assertion and reason are correct, and the reason is the correct explanation of the assertion.
(b) Both assertion and reason are correct, but the reason is not the correct explanation of the assertion.
(c) Assertion is correct, but the reason is incorrect.
(d) Assertion is incorrect, but the reason is correct.
Ans: (a)
The assertion is correct because necessary goods like food have inelastic demand, and the reason explains why: consumers have to buy them regardless of price changes.

Very Short Answer Type Questions

Q1: Define elasticity of demand.
Ans: Price elasticity of demand measures the responsiveness of demand to changes in price.

Q2: What does price elasticity of demand (ED) measure?
Ans: Perfectly elastic demand is a situation where demand changes infinitely with a small change in price.

Q3: Provide an example of perfectly inelastic demand.
Ans: Perfectly inelastic demand is when the quantity demanded remains unchanged, even with a change in price.

Q4: Explain perfectly elastic demand and provide an example.
Ans: Elasticity is unit-free because it is expressed in percentage terms and is independent of the choice of units for quantity and price.

Q5: What is the characteristic feature of a unitary elastic demand?
Ans: A flatter demand curve indicates higher elasticity, i.e., greater responsiveness to price changes.

Q6: Describe the concept of the total expenditure method.
Ans: At the intersection of two demand curves, the flatter curve is more elastic.

Q7: Why does the availability of close substitutes make demand more elastic?
Ans: Cross elasticity measures the responsiveness of the quantity demanded of one good to a change in the price of another. Close substitutes typically have positive cross elasticity.

Q8: Give an example of complementary goods.
Ans: Rice, a staple food, is an example of an essential good.

Q9: How does the time period affect the elasticity of demand?
Ans: A luxury car, such as a Rolls-Royce, is an example of a luxury good.

Q10: What is the significance of understanding the elasticity of demand for a producer or firm?
Ans: When the price increases for elastic goods, the total expenditure decreases.

Short Answer Type Questions

Q1: Explain the concept of price elasticity of demand (PED) and its importance in economics.
Ans: Price elasticity of demand (PED) measures how responsive the quantity demanded of a good is to changes in its price. It's crucial in economics because it helps firms and policymakers understand how changes in price affect total revenue, consumer behavior, and market dynamics. Elastic goods are sensitive to price changes and can result in decreased revenue if prices rise. Inelastic goods, on the other hand, have less responsive demand and may lead to increased revenue when prices go up.

Q2: Differentiate between perfectly inelastic and perfectly elastic demand. Provide real-world examples for each.
Ans: Perfectly inelastic demand means that the quantity demanded remains constant, regardless of changes in price. An example is life-saving medications because people will pay any price to stay alive. Perfectly elastic demand, in contrast, occurs when consumers are willing to buy an infinite quantity at a given price and nothing at a higher price. An example is an auction, where bidders are only willing to pay a specific price for the item.

Q3: Describe the factors that affect the elasticity of demand. Provide examples for each factor.
Ans: Several factors affect demand elasticity, including the availability of substitutes (more substitutes make it more elastic), necessity vs. luxury (necessities tend to be inelastic, luxuries elastic), time horizon (longer timeframes make demand more elastic), and the definition of the market (narrower definitions lead to more elastic demand). For example, gasoline has inelastic demand due to a lack of good substitutes, while smartphones have elastic demand because of various substitutes and a shorter life span.

Q4: Discuss the total expenditure method for measuring elasticity of demand and its practical implications for producers.
Ans: The Total Expenditure method helps estimate how changes in price affect total spending by consumers and, consequently, a producer's revenue. When the price elasticity of demand is greater than 1 (elastic demand), a price increase decreases total expenditure and lowers revenue. In contrast, when the elasticity is less than 1 (inelastic demand), a price increase raises total expenditure and increases revenue. This method helps producers set optimal prices to maximize revenue.

Q5: Why does the price level influence the elasticity of demand? Provide examples.
Ans: The price level influences demand elasticity because consumers are more responsive to price changes when the product represents a significant portion of their budget. For example, if the price of coffee beans rises significantly, coffee consumers are likely to reduce their consumption because it's a larger part of their budget. However, if the price of toothpaste rises significantly, people are less likely to change their consumption patterns because it's a small portion of their budget.

Q6: Explain how the availability of close substitutes impacts the elasticity of demand.
Ans: The availability of close substitutes makes demand more elastic. When consumers have several similar products to choose from, they can easily switch to a substitute if the price of one product increases. This higher responsiveness to price changes results in more elastic demand. For example, if the price of one brand of cereal rises, consumers can switch to a similar cereal brand without significant inconvenience.

Q7: Define and provide examples of goods with different uses that exhibit varying degrees of elasticity.
Ans: Necessities like prescription medications and utilities (water and electricity) often have inelastic demand. Comfort goods like branded clothing and electronics usually have elastic demand. Luxury items such as high-end fashion and fine dining experiences tend to have very elastic demand.

Q8: How does the time period affect the elasticity of demand, and why is this concept important in economic analysis?
Ans: The elasticity of demand can change over time. In the short term, demand may be inelastic because consumers cannot quickly adjust their behavior. In the long term, consumers can adapt, find substitutes, and be more price-sensitive, making demand more elastic. Understanding this concept is crucial for firms, policymakers, and analysts to make informed decisions about pricing, supply, and market strategies.

Long Answer Type Questions

Q1: Describe the various degrees or types of price elasticity of demand and their implications for different goods and services. Provide examples to illustrate each type.
Ans: Price elasticity of demand can be classified into different types:

• Perfectly Inelastic (PED = 0): Demand doesn't change with price. Example: Life-saving medicines.
• Inelastic (0 < PED < 1): Demand changes less than proportionally to price. Example: Gasoline.
• Unitary Elastic (PED = 1): Percentage change in demand equals the percentage change in price. Example: Eggs.
• Elastic (PED > 1): Demand is sensitive to price changes. Example: Smartphones.
• Perfectly Elastic (PED = ∞): Demand changes infinitely with a small price change. Example: Auctions. Different goods fall into these categories, influencing pricing and market strategies.

Q2: Discuss the limitations of the total expenditure method in measuring elasticity of demand and explain why it provides only a rough measure of elasticity.
Ans: The Total Expenditure method has limitations, as it assumes other factors affecting demand remain constant. In reality, various factors change simultaneously, making it challenging to isolate the impact of price changes on total expenditure. It provides only a rough measure because it doesn't account for factors like income changes or consumer preferences, which can significantly affect demand. Furthermore, it assumes a linear relationship between price and quantity demanded, which may not always hold.

Q3: Explain how the nature of a good, such as being a necessity, comfort, or luxury, affects its elasticity of demand. Provide insights into the relative nature of luxury goods.
Ans: The nature of a good is crucial in determining its elasticity of demand. Necessities like food, utilities, and basic healthcare are inelastic because consumers rely on them regardless of price changes. Comfort goods, such as branded clothing or mid-range electronics, tend to be elastic. Luxury goods, like high-end fashion or gourmet dining, are highly elastic because consumers can easily reduce their consumption when prices rise. The relative nature of luxury goods means they are particularly sensitive to price, impacting their demand.

Q4: Analyze the concept of habits and how they influence the elasticity of demand. Provide examples of products that have inelastic demand due to consumer habits and preferences.
Ans: Cross elasticity of demand measures the responsiveness of the quantity demanded of one good to changes in the price of another good. When goods are close substitutes, they typically have positive cross-elasticity. For example, if the price of Pepsi increases, the demand for Coca-Cola might increase because they are close substitutes. Conversely, when goods are complements, they tend to have negative cross-elasticity. If the price of printers increases, the demand for printer ink might decrease because they are complementary products. Understanding cross elasticity helps firms make pricing and marketing decisions.