Question

business is interested in 2D to help the by calcuns h ape Explore pricing decisions revenue when prices change Price and income elasticity of since demand Ewo variables. esity refers to responsiveness or sensitivity between Income elasticity of demand (YED) men sens the quantity demanded is to changes in t he Price elasticity of demand (PD) measures how sensitive her words, if income changes does demand che nity demanded is to changes in price in other about proportion or a smaller proportion than the words, ir price changes does demand change by a bigger proportion or a smaller proportion than the change change in price The YED will be influenced by the nature of the product For normal goods the relationship between price and The relationship can be positive or negative. For example, demand is inverse, le as price goes up demand goes to hury brand. Theriore ir income goes up we may switch from an Inferior brand income goes up vbrand. Therefore a rise in Income has had a nesative effect on the demand for the inferior brand but a positive effect on the demand for the luxury brand, in price? down and vice versa. Therefore the PED is expressed as regative effect on the a negative value A YED valse below -1 or above +1 indicates that the demand is income elastic. If it is between 1 and I then demand is income demand is income in If demand is price elastic then a change in price would lead to a more than proportional change in demand For example, if the PED IS-2 then a 5% increase in price would lead to a 10 fall in demand. Therefore putting price up would lead to a fall in sales revenue. making to improve marketing performance 3 marks 10 With the use of a numerical example, explain what is meant by price Inelastic demand, 3 marks 19 A product has a YED of +1.5. What does this mean? Exam-style questions 20 A product has a PED of -1.5. What does this mean? 3 masks

Answer 1

18......Demand for a commodity is price inelastic (e_p《1) ,if proportionate change in price (say 20%)is more than proportionate change in quantity demand (say 5%)

For example if price rises from $10 to $11 per unit (10% rise)and as a result quantity demand fall from 200 to 190 units (5% fall). Here the demand for the good is price inelastic.

19....If the YED (income elasticity of demand) is +1.5 ,it implies a positive relationship between income and demand (the good is normal not inferior).It also implies that YED is elastic (e_y》1).Here a change in income (say 10 % rise) will result demand to rise in a greater proportion (say 15% rise)

20......If PED is-1.5 ,it shows inverse relationship between price and quantity demand and the good is normal not giffen. It also implies that demand is price elastic (e_p》1) .Here change in proportionate price  (say 10 fall) will be less than proportionate change in quantity demand (15% rise)