Chapter 6:
Elasticities: Extension of Demand and Supply
How sensitive are consumers for price changes of a particular commodity?
The law of demand tells us that consumers will buy more of a product when its price declines and less when its price increases. But how
much more or less will they buy? The amount varies from product to product and over different price ranges for the same product. It may
also vary over time. And such variations matter. For example, a firm contemplating a price increase will want to know how consumers will
respond. If they remain highly loyal and continue to buy, the firm’s revenue will rise. But if consumers defect en masse to other sellers or
other products, its revenue will tumble.
Use the table below to answer/comment on the question/action at the top of the table for each of the products mentioned. Take into
consideration how you will react and why? Assume you have the financial ability to buy some of the more expensive items mentioned.
(table attachment / link)
Use the questions below to broaden the idea/concept of the elasticity of a commodity or service.
Questions:
1) Discuss each of the scenarios for each of the products/commodities mentioned in the table above? Use the following as guideline to
direct the answers.
A. Which of the products did you identify with an ED < 1 - please provide an explanation for this classification
B. Which of the products did you identify with an ED > 1 - please provide an explanation for this classification
2) What was the most important aspect that was considered in the decision making process in the table?
3) What were the typical products that the Government can impose an excise duty on?
1) If the price elasticity of demand for a product is equal to 0.8, then a 10 percent decrease in price will:
A) increase quantity demanded by 8 percent.
B) increase quantity demanded by 0.8 percent.
C) decrease quantity demanded by 8 percent.
D) decrease quantity demanded by 0.8 percent.
2) Along a linear downward-sloping demand curve, the price elasticity of demand will be:
A) greater than one across each price range.
B) less than one across each price range.
C) equal to zero across each price range.
D) different across each price range.
3) Following a decrease in price from R40 to R35, the weekly demand for a magazine increases from 100,000 to 120,000 copies.
The price elasticity of demand for magazines in this range is:
A) .43.
B) .625.
C) .98.
D) 1.23.
7) If 100 units of product K are sold at a unit price of R10 and 75 units of product K are sold at a unit price of R15, one can conclude that
in this price range:
A) demand for product K is elastic.
B) demand for product K is inelastic.
C) demand for product K has shifted to the right.
D) consumers are sensitive to price changes of product K.
8) Suppose the price elasticity coefficients of demand are 1.43, 0.67, 1.11, and 0.29 for products W, X, Y, and Z respectively. A 1
percent decrease in price will increase total revenue in the case(s) of:
A) W and Y.
B) Y and Z.
C) X and Z.
D) Z and W.
