Vedantu PDF for Economics Class 12 Chapter 4 Solutions Available For Free
FAQs on Elasticity of Demand: Class 12 Microeconomics Chapter 4
1. What is Price Elasticity of Demand (PED) as per the Class 12 Microeconomics syllabus?
Price Elasticity of Demand (PED) measures the degree of responsiveness of the quantity demanded of a commodity to a change in its own price. In simple terms, it shows how much the demand for a product will change when its price goes up or down. It is calculated using the percentage method: E_p = (Percentage Change in Quantity Demanded) / (Percentage Change in Price).
2. What are the five degrees of price elasticity of demand? Explain with examples.
The five degrees of price elasticity of demand describe how sensitive demand is to price changes:
- Perfectly Elastic Demand (E_d = ∞): Consumers will buy an infinite amount at a specific price, but none at all if the price increases even slightly. This is a theoretical concept, represented by a horizontal demand curve.
- Perfectly Inelastic Demand (E_d = 0): The quantity demanded does not change at all, regardless of the price change. Example: life-saving medicines.
- Unitary Elastic Demand (E_d = 1): The percentage change in quantity demanded is exactly equal to the percentage change in price. For example, a 10% price drop leads to a 10% increase in demand.
- Relatively Elastic Demand (E_d > 1): The percentage change in quantity demanded is greater than the percentage change in price. Example: luxury goods like foreign travel.
- Relatively Inelastic Demand (E_d < 1): The percentage change in quantity demanded is less than the percentage change in price. Example: essential goods like salt or fuel.
3. Why is the demand for essential goods generally inelastic, while the demand for luxury goods is elastic?
The demand for essential goods, such as food staples and medicine, is inelastic because they are necessities. Consumers need to purchase them regardless of price changes, and there are often few close substitutes. Therefore, a price increase does not significantly reduce the quantity demanded. In contrast, luxury goods like sports cars or designer clothing are elastic because they are non-essential. Consumers can easily postpone their purchase or switch to other alternatives if the price rises, leading to a significant drop in quantity demanded.
4. How does the availability of close substitutes affect the price elasticity of demand?
The availability of close substitutes is a major determinant of price elasticity. If a product has many substitutes (e.g., different brands of soft drinks), its demand will be highly elastic. This is because a small increase in its price will cause consumers to switch to the cheaper substitutes, leading to a large fall in demand. Conversely, if a product has no close substitutes (e.g., a patented drug), its demand will be inelastic as consumers have no alternative options.
5. Explain how the Total Expenditure Method is used to measure price elasticity of demand.
The Total Expenditure Method, developed by Alfred Marshall, measures price elasticity by comparing the change in a product's price with the change in the total expenditure on it. Total Expenditure is calculated as Price × Quantity Demanded. The relationship is as follows:
- If a price change causes total expenditure to move in the opposite direction (e.g., price falls, expenditure rises), demand is elastic (E_d > 1).
- If a price change causes total expenditure to move in the same direction (e.g., price falls, expenditure also falls), demand is inelastic (E_d < 1).
- If a price change does not change the total expenditure, demand is unitary elastic (E_d = 1).
6. What is the key difference between price elasticity and income elasticity of demand?
The key difference lies in the variable causing the change in demand. Price elasticity of demand measures how quantity demanded responds to a change in the commodity's own price, assuming other factors like income are constant. In contrast, income elasticity of demand measures how quantity demanded responds to a change in the consumer's income, assuming price is constant. Price elasticity helps in pricing decisions, while income elasticity helps in classifying goods as normal or inferior.
7. Why does the elasticity of demand for a commodity tend to increase over a longer time period?
Demand for a commodity becomes more elastic over a longer period for two main reasons. Firstly, it takes time for consumers to adjust their consumption habits and preferences in response to a price change. Secondly, more substitutes may become available in the long run. For instance, if petrol prices rise, demand might be inelastic in the short run as people cannot immediately change their cars. However, in the long run, they can switch to more fuel-efficient cars or electric vehicles, making the demand more elastic.
8. How can a business use the concept of price elasticity of demand for its pricing strategy?
Understanding price elasticity is crucial for setting prices to maximise revenue. If a business finds that the demand for its product is inelastic, it can increase the price, and the total revenue will also increase because the fall in demand will be less than proportionate to the price rise. Conversely, if the demand is elastic, the business should lower its price. The resulting increase in quantity demanded will be more than proportionate to the price drop, leading to higher total revenue.
