12th Economics Chapter 3B (Elasticity of Demand) Maharashtra Board – Free Solution

12th Economics Chapter 3B – Elasticity of Demand

12th Economics Chapter 3B - Elasticity of Demand

Chapter 3B – Elasticity of Demand

Q. 1. Complete the following statements by choosing the correct alternatives

1) Price elasticity of demand on a linear demand curve at the X-axis is _____.
a) zero
b) one
c) infinity
d) less than one

2) Price elasticity of demand on a linear demand curve at the Y-axis is equal to _____.
a) zero
b) one
c) infinity
d) greater than one

3) Demand curve is parallel to X-axis, in the case of _____.
a) perfectly elastic demand
b) perfectly inelastic demand
c) relatively elastic demand
d) relatively inelastic demand

4) When the percentage change in quantity demanded is more than the percentage change in price, the demand curve is _____.
a) flatter
b) steeper
c) rectangular
d) horizontal

5) Ed = 0 in case of _____.
a) luxuries
b) normal goods
c) necessities
d) comforts

Q. 2. Give economic terms

1) Degree of responsiveness of quantity demanded to change in income only. Income Elasticity of Demand.

2) Degree of responsiveness of a change in quantity demanded of one commodity due to change in the price of another commodity. Cross Elasticity of Demand.

3) Degree of responsiveness of a change of quantity demanded of a good to a change in its price.
Price Elasticity of Demand.

4) Elasticity resulting from infinite change in quantity demanded. Perfect Elasticity

5) Elasticity resulting from a proportionate change in quantity demanded due to a proportionate change in price. Unitary Elasticity

Q. 3. Complete the correlation

1) Perfectly elastic demand : Ed = ∞ : : Perfectly inelastic demand : Ed = 0

2) Rectangular hyperbola : Unitary elastic demand : : Steeper demand curve : Relatively inelastic demand.

3) Straight line demand curve : Linear demand curve : : Curved line demad curve : non linear demand curve.

4) Pen and ink : Complementary Goods : : Tea and Coffee : Substitutes.

5) Ratio method : Ed = %Change in Quantity / %Change in Price : : Geometrical Method : Ed = Lower segment / Upper segment

Q.4. Assertion and Reasoning type questions

1) Assertion (A): Elasticity of demand explains that one variable is influenced by another variable.
Reasoning (R): The concept of elasticity of demand indicates the effect of price and changes in other factors on demand.
Options :
1) (A) is True, but (R) is False
2) (A) is False, but (R) is True
3) Both (A) and (R) are True and (R) is the correct explanation of (A)
4) Both (A) and (R) are True and (R) is not the correct explanation of (A)

2) Assertion (A): A change in quantity demanded of one commodity due to a change in the price of other commodity is cross elasticity.
Reasoning (R): Changes in consumers income leads to a change in the quantity demanded.
Options :
1) (A) is True, but (R) is False
2) (A) is False, but (R) is True
3) Both (A) and (R) are True and (R) is the correct explanation of (A)
4) Both (A) and (R) are True and (R) is not the correct explanation of (A)

3) Assertion (A): Degree of price elasticity is less than one in case of relatively inelastic demand.
Reasoning (R): Change in demand is less then the change in price.
Options :
1) (A) is True, but (R) is False
2) (A) is False, but (R) is True
3) Both (A) and (R) are True and (R) is the correct explanation of (A)
4) Both (A) and (R) are True and (R) is not the correct explanation of (A)

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Q.5. Distinguish between

1) Relatively elastic demand and Relatively inelastic demand.

PointsRelatively elastic demandUnitary elastic demand
1)MeaningWhen a percentage change in price leads to more than proportionate change in quantity demanded, the demand is said to be relatively elastic. When a percentage change in price leads to less than proportionate change in the quantity demanded, demand is said to be
relatively inelastic.
2) Numerical ValueThe numerical value of elasticity of demand is greater than one.The numerical value of elasticity of demand is lesser than one.

2) Perfectly elastic demand and Perfectly inelastic demand.

PointsPerfectly elastic demand.Perfectly inelastic demand.
1)MeaningWhen a slight or zero change in the price brings about an infinite change in the quantity demanded of that commodity, it is called perfectly elastic demand. When a percentage change in price has no effect on the quantity demanded of a commodity it is called perfectly inelastic demand.
2) Numerical ValueThe numerical value of elasticity of demand is Infinite.The numerical value of elasticity of demand is zero.

Q.6. Answer the following questions

1) Explain the factors influencing elasticity of demand.

Answer: Elasticity of demand depends upon several factors which are discussed below:

1) Nature of commodity: By nature we can classify commodities as necessaries, comforts and luxury goods. Demand for necessaries like foodgrains, medicines, textbooks etc. is relatively inelastic and for comforts and luxury goods like cars, perfumes, furniture etc. demand is relatively elastic.

2) Availability of substitutes: Demand for a commodity will be more elastic, if its close substitutes are available in the market. For example, lemon juice, sugarcane juice etc. But commodities having no close substitutes like salt the demand will be inelastic.

3) Number of uses: Single use goods have a less elastic demand. Multi-use goods have more elastic demand, For example, coal, electricity etc.

4) Habits: Habits make demand for certain goods relatively inelastic. For example, addicted goods, drugs etc.

5) Durability: The demand for durable goods is relatively elastic. For example, furniture, washing machine etc. Demand for perishable goods is inelastic. For example, milk, vegetables etc.

6) Complementary goods: The demand for a commodity which is used in conjunction with other commodities to satisfy a single want is relatively inelastic. For example, a fall in the price of mobile handsets may lead to rise in the demand for sim cards.

7) Income of the consumer: Demand for goods is usually inelastic, if the consumer has high income. The demand pattern of a very rich and an extremely poor person is rarely affected by significant changes in the
price.

8) Urgency of needs: Goods which are urgently needed will have relatively inelastic demand. For example, medicines. Luxury goods which are less urgent have relatively elastic demand.

9) Time period: Elasticity of demand is always related to period of time. It varies with the length of time period. Generally speaking, longer the duration of period greater will be the elasticity of demand and vice-versa. This is because a consumer can change the consumption habits in the long run in favour of cheaper substitutes of the commodities.

10) Proportion of expenditure: If the proportion of expenditure in a person’s income is small, then demand for the product is relatively inelastic. For example, news papers. If the proportion of expenditure is large, then demand for the product is relatively elastic.

Note: If question is asked for 8 marks write 9 to 10 points and if question is asked for 4 marks write 4 to 6 points ( Use this suggestion for all questions and chapters)

2) Explain the total outlay method of measuring elasticity of demand? (Total expenditure method)

Answer: This method was developed by Prof. Marshall. In this method, total amount of expenditure before
and after the price change is compared.this method is also known as Total expenditure method.

Here the total expenditure refers to the product of price and quantity demanded.
Total expenditure = Price × Quantity demanded
In this connection, Marshall has given the following propositions:

A) Relatively elastic demand (Ed >1): When with a given change in the price of a commodity total outlay increases, elasticity of demand is greater than one.

B) Unitary elastic demand (Ed = 1): When price falls or rises, total outlay does not change or remains constant, elasticity of demand is equal to one.

C) Relatively inelastic demand (Ed <1): When with a given change in price of a commodity total outlay decreases, elasticity of demand is less than one.

This can be explained with the help of the following example.

Total expenditure method

In the above table, in example ‘A’ original price is Rs 10 per unit and quantity demanded is 6 units. Therefore, total expenditure incurred is Rs 60. When price rises to Rs 20 quantity demanded falls to 5 units, the total expenditure incurred is Rs 100. In this case, total outlay is greater than original expenditure. Hence, in this example elasticity of demand is greater than one. (Ed >1) that is relatively elastic demand.

In example ‘B’, original price is Rs 30 per unit and quantity demanded is 4 units. Therefore total expenditure is Rs 120. When price rises to Rs 40 quantity demanded falls to ‘3’ units. Total expenditure incurred is Rs120. In this case total outlay is same (equal) to original expenditure. Hence, in this example, elasticity of demand is equal to one (Ed = 1) that is unitary elastic demand.

In example ‘C’, original price is Rs 50 per unit and quantity demanded is 2 units. Therefore total expenditure is Rs 100. When price rises to Rs 60, quantity demand falls to 1 unit and total expenditure incurred is Rs 60. In this case total outlay is less than original expenditure. Hence, elasticity of demand is less than one (Ed <1) that is relatively inelastic demand.

3) Explain importance of elasticity of demand.

Answer: The concept of elasticity of demand is of great importance to producers, farmers, workers and the Government. Lord Keynes considered this concept to be the most important contribution of Alfred Marshall. Significance of the concept becomes clear from the following applications

1) Importance to a Producer: Every producer has to decide the price of his product at which he has to sell it. For this purpose, elasticity of demand becomes important. If the demand for a product is relatively inelastic, he will fix up a higher price and vice-versa. The concept of elasticity of demand is also useful to a monopolist to practice price discrimination.

2) Importance to Government: Taxation policy of the Government is based on the concept of elasticity of demand. Those commodities whose demand is relatively inelastic will be taxed more because it will not affect their demand much and vice-versa.

3) Important in Factor Pricing: The concept of elasticity of demand is useful in determination of factor prices. The factor of production for which demand is relatively inelastic can command a higher price as compared to those having elastic demand. For example, workers can ask for higher wages, if the demand for the product
produced by them is relatively inelastic.

4) Importance in Foreign Trade: The concept of elasticity of demand is useful to determine terms and conditions in foreign trade. The countries exporting commodities for which demand is relatively inelastic can
raise their prices. For example, OPEC have increased the price of oil several times. The concept is also useful in formulating export and import policy of a country.

5) Public Utilities: In case of public utilities like railways which have an inelastic demand, Government can either subsidise or nationalise them to avoid consumers exploitation.

6) Proporti on of expenditure: If the proportion of expenditure in a person’s income is small, then demand for the product is relatively inelastic. For example, news papers. If the proportion of expenditure is large, then demand for the product is relatively elastic.

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Q.7. Observe the following figure and answer the questions

1) Identify and define the degrees of elasticity of demand from the following demand curves.

Degree of Elasticity of demand

a) Perfectly Inelastic Demand: When a percentage change in price has no effect on the quantity demanded of a commodity it is called perfectly inelastic demand.

b) Perfectly Elastic Demand: When a slight or zero change in the price brings about an infinite change in the quantity demanded of that commodity, it is called perfectly elastic demand.

c) Unitary elastic demand: When a percentage change in price leads to a proportionate change in quantity demanded then demand is said to be unitary elastic.

d) Relatively elastic demand: When a percentage change in price leads to more than proportionate change in quantity demanded, the demand is said to be relatively elastic.

2) In the following diagram AE is the linear demand curve of a commodity. On the basis of the given diagram state whether the following statements are True or False. Give reasons to your answer.

linear demand curve

1) Demand at point ‘C’ is relatively elastic demand.
Answer:
False
Reason: On the demand curve AE, the distance of CE is less than that of CA. Thus, point ‘C’ is close to X-axis. therefore, the demand at point ‘C’ is realtively inelastic.

2) Demand at point ‘B’ is unitary elastic demand.
Answer: False
Reason: On the demand curve AE, the distance of BE is greater than that of BA. Thus, point ‘B’ is close to Y-axis. therefore, the demand at point ‘B’ is realtively elastic.

3) Demand at point ‘D’ is perfectly inelastic demand.
Answer: False
Reason: On the demand curve AE, the distance of DE is equal to that of DA. Thus, point ‘D’ is at same distance from both axis. therefore, the demand at point ‘D’ is unitary elastic.

4) Demand at point ‘A’ is perfectly elastic demand.
Answer: True
Reason: On the demand curve AE, at point ‘A’ the lower segment of the demand curve is AE and there is no upper segment. therefore, the demand at point ‘A’ is Perfectly elastic.

Extra Questions

Distinguish Between:

1) Income Elasticity of Demand and Cross Elasticity of Demand.

Income Elasticity of DemandCross Elasticity of Demand
It refers to the degree of responsiveness of a change in quantity demanded to a change in the income only, other factors including price remain unchanged.It refers to a change in quantity demanded of one commodity due to a change in the price of other commodity. (Complementary goods or substitutes)
Ey = % Change in quantity demanded Q /
% Change in income of a consumer Y
Ec = Percentage change in Qty. demanded of A/Percentage change in Price of B
(A = Original commodity, B = Other commodity)

Answer the following questions:

1) Explain the types of Elasticity of Demand.

Answer:
Refer to QNO 6 (1) for the Law of Demand.
Following are the assumptions of the law of demand:
1) Constant level of income: If the law of demand is to find true operate then, consumers’ income should remain constant. If there is a rise in income, people may demand more at a given price.

2) No change in size of population: It is assumed that the size of population remains unchanged. Any change in the size and composition of population of a country affects the total demand for the product.

3) Prices of substitute goods remain constant: It is assumed that the prices of substitute remain unchanged. Any change in the price of the substitute will affect the demand for the commodity.

4) Prices of complementary goods remain constant: It is assumed that the prices of complementary goods remain unchanged because a change in the price of one goods will affect the demand for the other.

5) No expectations about future changes in prices: It is assumed that consumers do not expect any further change in price in the near future. If consumers expect a rise in prices in future, they may demand more in the present even at existing high price.

6) No change in tastes, habits, preferences, fashions etc.: It is assumed that consumers’ tastes, habits, preferences, fashions etc. should remain unchanged. Any change in these factors will lead to a change in demand.

7) No change in taxation policy: Taxation policy of the government has a great impact on demand for various goods and services. Therefore, it is assumed that there is no change in the policy of taxation declared
by Government.

2) What are the types pf price elasticity of demand.

Answer:
Definition of Demand:
According to Benham, “the demand for anything at a given price is the amount of it, which will be bought per unit of time at that price.”
Thus, the following are the features of demand :
1) Demand is a relative concept.
2) Demand is essentially expressed with reference to time and price.

Demand Schedule:
A demand schedule is a tabular representation of the functional relationship between price and quantity demanded for a particular commodity.
A demand schedule may be either an individual demand schedule or a market demand schedule.

Individual Demand Schedule:

Individual demand is the quantity of a commodity demanded by a consumer at a given price during a given period of time.

This can be explained with the help of the following individual demand schedule.

Price of commodity ‘x’ ( Rs )Quantity demanded of commodity ‘x’ (in kgs)
101
82
63
44
25

Above table shows different quantities of commodity ‘x’ purchased by an individual consumer at various prices. It can be observed that less quantity of commodity is demanded at rising prices and more quantity of commodity is demanded at falling prices. It indicates an inverse relationship between price and quantity demanded.

Individual Demand Curve :

Indidual Demand Curve

Market Demand Schedule:

Market demand is the total demand for a commodity from all the consumers at a given price during a given period of time.

This can be explained with the help of following market demand schedule.

Price of commodity
‘x’ ( Rs )
Quantity demanded of commodity ‘x’
(in kgs)
Consumer A
Quantity demanded
of commodity ‘x’
(in kgs)
Consumer B
Quantity demanded
of commodity ‘x’
(in kgs)
Consumer C
Market
demand
A+B+C
105101530
810152045
615202560
420253075
225303590

shows different quantities of commodity x purchased by different consumers (A, B, C) at various prices. It can be observed that less quantity of commodity is demanded at rising prices and more quantity of commodity
is demanded at falling prices. Thus, there is an inverse relationship between price and quantity
demanded.

Market Demand Curve:

Market demand Curve 2

3) Explain the Ratio or Percentage method of measuring elasticity of demand?

Answer:
Types of Demand

1) Direct demand: It is the demand by the consumer for goods that satisfy their wants directly. They serve the direct consumption needs of the consumers. Thus, it is the demand for consumer goods. For example, demand for cloth, sugar, etc.

2) Indirect demand: Indirect demand is also known as derived demand. It refers to the demand for goods that are needed for further production. It is the demand for producer’s goods. Hence, all factors of production have indirect or derived demand. For example, demand for workers in a sugar factory is derived or indirect demand.

3) Complementary/Joint demand: When two or more goods are demanded jointly to satisfy a single want, it is known as joint or complementary demand. For example, car and fuel, etc.

4) Composite demand: The demand for a commodity that can be put to several uses is known as composite demand. For example, electricity is demanded for several uses such as light, fan, washing machine, etc.

5) Competitive demand: It is demand for those goods which are substitutes for each other. For example, tea or coffee, sugar or jaggery, etc.

4) Explain the Point or Geometric method of measuring elasticity of demand?

Answer:
When the demand for a commodity falls or rises due to a change in price alone and other factors remain constant, it is called variations in demand. It is of two types :

1) Expansion of demand: Expansion of demand refers to rise in quantity demanded due to fall in price alone while other factors like tastes, income of the consumer, size of population, etc. remain unchanged.
Demand moves in downward direction on the same demand curve.
This is explained with the help of following figure.

Expansion of Demand

As shown in above fig. DD is demand curve. A downward movement on the same demand curve from point a to point b indicates an expansion of demand.

2) Contraction of Demand: Contraction of demand refers to a fall in demand due to rise in price alone. Other factors like tastes, income of the consumer, size of population etc. remain unchanged.
Demand curve moves in the upward direction on the same demand curve.
This can be explained with the help of following fig.

Contraction of Demand

As shown in above fig. DD is a demand curve. An upward movement on the same demand curve from point b to point a shows contraction of demand.

12th Commerce Economics Textbook Solutions

Chapter Name Solution Link
1) Introduction to Micro and Macro EconomicsClick Here
2) Utility AnalysisClick Here
3A) Demand AnalysisClick Here
3B) Elasticity of DemandClick Here
4) Supply AnalysisClick Here
5) Forms of MarketClick Here
6) Index NumbersClick Here
7) National IncomeClick Here
8) Public Finance in IndiaClick Here
9) Money Market and Capital Market in IndiaClick Here
10) Foreign Trade of IndiaClick Here

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