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Calculate the income elasticity of demand

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Elasticity concepts:

1. Suppose that when price increases from 4 to 5, demand falls from 10 to 8. What is the percentage increase in price? What is the percentage fall in demand? Hence calculate the price elasticity of demand for this price increase. Now suppose that when price falls from 5 to 4, demand increases from 8 to 10. Calculate the percentage price fall, the percentage demand increase and hence the resulting elasticity. Compare your answer to your earlier one.

2. Explain the difference between elastic and inelastic demand. Do you expect the demand for petrol to be price elastic or inelastic?

3. What is the relationship between the price elasticity of demand and total revenue?

a. If demand is price elastic, what happens to revenue when price increases?

b. If demand is price inelastic, what happens to revenue when price falls?

4. Define the income elasticity of demand. If, when income rises from 20 to 30, demand for a particular good increases by 20%, calculate the income elasticity of demand. Is the demand income elastic or inelastic? Is the good normal or inferior?

5. Define the price elasticity of supply. What is the relationship between the price elasticity of supply and the slope of the supply curve?

Reference no: EM132203306

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