Question

Interpret the following elasticities for products A, B and C, by specifying whether (a) the product is normal or prestige (b)
whether it is elastic, or inelastic etc.
Product A : Elasticity of demand is ( - ) 2
Product B: Elasticity of demand is (+) 0.3
Product C: Elasticity of demand is (- ) 1.0
In the case of Product C also explain what you expect to happen if price increases by 10%?

Answer 1

A.When elasticity of demand is greater than 1 in absolute terms,then demand is elastic.Generally normal products with a number of substitutes have elastic demand like shampoos, make-up products etc.

B.When elasticity of demand is less than 1,then demand is inelastic.In that case a rise in price does not cause quantity demanded to fall by much amount.Necessary goods have inelastic demand like life sabing drugs.

C.When Ed=1,then demand is unitary elastic.A change in price will change the quantity demanded by the exact same proportion.

If price increases by 10% then quantity demanded falls by 10%