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Question
The price elasticity of demand for a good is - 0.4. If its price increases by 5 percent, by what percentage will its demand fall? Calculate.
Solution
`e_d="Percentage in quantity demanded of the good"/"Percentage in price of the good"`
`0.4="Percentage in quantity demanded of the good"/5`
Percentage in quantity demanded of the good = 0.4 x 5 = 2
Hence,as the price increases by 5%, the quantity demanded falls by 2%.
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| Columns I | Columns II |
| (1) Perfectly elastic supply | (a) Es > 1 |
| (2) Perfectly inelastic supply | (b) Es < 1 |
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| (4) Relatively elastic supply | (d) Es = 0 |
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| Column A | Column B |
| 1. Increase or decrease in demand for a commodity does not cause any change in its price. | (a) Effect on supply, in the case of Perfectly Elastic Demand. |
| 2. Increase or decrease in demand causes a change in the price of the commodity. Equilibrium quantity remains constant. | (b) Effect on demand, in the case of Perfectly Inelastic Supply. |
| 3. Increase or decrease in demand cause a change in the price of the commodity. Equilibrium quantity remains constant. | (c) Effect on demand, in the case of Perfectly Elastic Supply. |
| 4. Increase or decrease in demand for a commodity does not cause any change in its price. | (d) Effect on supply, in the case of Perfectly Elastic Demand. |
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Reasoning (R) : Changes in consumers income leads to a change in the quantity demanded.
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- Luxuries goods have generally elastic demand.
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