Question

11. Refer to the following extract of a review paper from Natural Resources Research about Helium: "Helium has unique properties which make it essential for vital technologies that affect our lives every day, such as usage in advanced medical imaging equipment, semiconductors, fiber optics and liquid crystal displays Qatar is a major supplier of helium accounting for approximately 32% of the global helium supply. On June 5, 2017. its neighboring countries initiated a trade embargo on Qatar. As a result, the price of helium jumped." (Modified from https://link.springer.com/article/10.1007/s11053-017-9359-y) A research estimated that the sales volume of helium might decrease by only 3% when there was an increase in the price by 10%. Calculate the relevant price elasticity for Helium based on these figures. State whether this represented the demand elasticity or supply elasticity. (2 marks) b. Is the price elasticity calculated in (a) elastic or inelastic? Is this elasticity (elastic or inelastic) consistent with the description in the above extract? (2 marks) c. Show the effect of the above situation in a well-labeled supply-and-demand diagram on the equilibrium price and quantity. Explain briefly whether you should use a steeper or flatter demand curve to better illustrate the elasticity calculated in (a). (4 marks)

Answer 1

a) Sales volume refers to the demand of helium in the market. Therefore, the elasticity calculated in this question is demand elasticity.

Given: % change in demand = -3%

% change in Price = +10%

Price elasticity of demand (E_p) = % change in demand/% change in Price

E_p = -3/10 = 0.3

b) The price elasticity of demand is inelastic as expected from the context. Since, helium is a necessary raw material in production of a lot of technologies important to produce necessary goods, therefore, decrease in demand for helium falls is less than proportional to the rise in price of helium.

c) The demand curve will be steeper here because helium is a necessary raw material as explained in part (b)

Price Str: Supply curve of Helium Dr & Demand curre of Helium 109 Set. Quantity

{(P₂ - P₁)/P₁}*100= 10 and {(Q₂ - Q₁)/Q₁}*100= -3