Question

1. Define Demand Elasticity:                                   

2. Define Elastic Demand and give a product example:

3. Define Inelastic Demand and give a product example:

4. Typically when the price of a product falls the Total Revenue (TR) for the company making the product will:

         increase/decrease (circle one) if the product has an elastic demand and

         increase/decrease (circle one) if the product has an inelastic demand.

Answer 1

1. Demand elasticity can be defined as the measure of responsiveness in the quantity demanded for the product or services with respect to change in prices

2. Elastic goods are the good which shows higher responsiveness in demand to change in the prices of the product. Example includes motor vehicles

3. Inelastic goods are the goods which shows less or are non-responsive in demand to changes in price. Example includes Milk,gasoline etc.

4. If elastic product than price fall will be more than compensated by the demand increase and hence total revenue will increase

If inelastic then price fall will lead to decrease in revenue since demand is less responsive to inelastic good and hence will not be able to compensate for price fall