Question

2. Answer each of the following questions (3-4 sentence answers required for each part in order to receive full credit):

1. In words, describe a good that is likely to be inelastic at the market equilibrium. Why? Gasoline is an example, but don’t use that good for your answer.
2. In words, describe a good that is likely to be elastic at the market equilibrium. Why?
3. In words, describe a good that is likely to be unit elastic at the market equilibrium. Why?

Answer 1

2)a) Inelastic is when the price change does affects the quantity demanded with a lesser proportion ie has a less effect on the quantity demanded irrespective of the price changes .One example given in the question is of gasoline. Other could be of concert tickets of a world known singer or diamonds . There would be practically no substitutes available of them in the market . So the price change would have a lesser effect on the change in quantity demanded.

b) Elastic goods are the ones whose price affects the quantity demanded in a higher proportion . It means it has more effect on quantity demanded . This is in case of goods which have more substitutes. Eg: Coke . A rise in price of coke would reduce the quantity demanded more than the increase in price because of presence of substitutes in the market of coke like pepsi .

c) Unitary elastic is when the change in price is in same proportion to the change in quantity demanded . This is an unrealistic case in real life but there could be close examples of it. CLose examples could be old mobile phones . IF the price increases by 10%, the quantity demanded could reduce by nearly 10%.

(You can comment for doubts )