EXAMPLES
Q.1 REDUCTION IN THE PRICE OF LAPTOP FROM Rs. 30,000 FROM Rs. 28,000
PUSHED UP DEMAND FROM 4000 UNITS TO 7000 UNITS. FIND ARC Ed .
Q. 2 10% INCREASE IN THE ADVERTISEMENT EXPENDITURE CAUSES 4%
INCREASE IN THE SALES VOLUME. WHAT IS THE PROMOTIONAL
EALASTICITY OF DEMAND?
Q. 3 DEMAND FOR WHEAT IS 50 MILLION TONNES AND INCOME Ed FOR
WHEAT IS 0.6. IF PER CAPITA INCOME RISES BY 5%, ESTIMATE DEMAND
FOR WHEAT.
Q. 4 PRICE Ed FOR A CERTAIN COMMODITY IS - 0.5 AND INCOME
Ed FOR THE SAME PRODUCT IS + 0.75. IF INCOME OF A
CONSUMER INCREASES BY 20% AND AT THE SAME TIME,
THE PRICE OF THIS PRODUCT FALLS BY 10%, FIND THE NEW
DEMAND FOR THE PRODUCT.
Q.5 PRICE Ed FOR A CERTAIN COMMODITY X IS - 0.6 WHILE CROSS ELASTICITY
WITH RESPECT TO THE PRICE OF THE PRODUCT Y IS + 1.2, IF THE SELLER
OF COMMODITY Y REDUCES THE PRICE OF Y BY 10%, WHAT PRICING
DECISION SHOULD BE TAKEN BY THE FIRM SELLING X SO AS TO KEEP THE
SALES VOLUME OF X UNCHANGED?
Q.6 CROSS Ed FOR CADBURY w.r.t. TO THE PRICE OF KITKAT IS + 0.5
WHEREAS DEMAND FOR CADBURY IS UNITARY ELASTIC. THE PRICE
OF KITKAT IS REDUCED FROM Rs. 10 TO Rs. 8, SO THE PRICE OF CADBURY
IS BROUGHT DOWN FROM Rs.15 TO Rs.12. WHAT WILL BE THE CHANGE
IN DEMAND FOR CADBURY?
Q.7 A MANAGER BELIEVES THAT THE DEMAND FOR HIS PRODUCT IS GIVEN
BY THE EQUATION P = 50 – Q/100. FIND Ed IF PRICE CHANGES FROM Rs. 10
TO Rs. 12.
Q.8 A MARKET CONSISTS OF TWO INDIVIDUALS. THEIR DEMAND EQUATIONS ARE
Q
1
= 100 – 4P ; Q
2
= 80 – 2P. FIND;
a] MARKET DEMAND FUNCTION
b] Ed FOR THE PRODUCT IN THE MARKET WHEN PRICE RISES FROM Rs. 10
TO Rs. 15.
Q.9 WHEN INCOME OF A HOUSEHOLD WAS Rs. 10,000, IT PURCHASED
5 kg. OF A PARTICULAR GOOD. ITS INCOME INCREASES FROM
Rs. 10,000 TO Rs. 12500 AND AT THE SAME TIME, THE PRICE OF THE
SUBSTITUTE OF THIS GOOD REDUCES FROM Rs. 20 TO Rs. 16.
ESTIMATE THE NEW DEMAND FOR THIS GOOD. GIVEN THAT INCOME
Ed = + 1.2 & CROSS Ed w.r.t. THE SUBSTITUTE = + 0.8.
Price of X Price of Y Income Demand (x) Demand (Y)
10
10
12
9
12
12
12
15
15
14
17
15
15000
16000
15000
17000
15000
16000
80
120
90
90
110
108
60
40
30
40
20
50
Q.10
CALCULATE : 1] Price elasticity of demand for X
2] Price elasticity of demand for Y
3] Income elasticity of demand for X
4] Cross elasticity demand for X w.r.t. Price of Y
SOLUTION : - 1
REDUCTION IN THE PRICE OF LAPTOP FROM Rs. 30,000 FROM Rs. 28,000
PUSHED UP DEMAND FROM 4000 UNITS TO 7000 UNITS. FIND ARC Ed .
ARC Ed = (?D/?P) * (P
1
+ P
2
)/(D
1
+ D
2
)
?D = +3000, ?P = -2000, (P
1
+ P
2
) = 58000, (D
1
+D
2
) = 11000
ARC Ed = (+3/-2)* (58000/11000) = - 7.9
10% INCREASE IN THE ADVERTISEMENT EXPENDITURE CAUSES 4%
INCREASE IN THE SALES VOLUME. WHAT IS THE PROMOTIONAL
EALASTICITY OF DEMAND?
SOLUTION : - 2
Promotional Ed =
% change in advertisement expenditure
% change in sales volume
= 4/10 = +0.4
SOLUTION : - 3
DEMAND FOR WHEAT IS 50 MILLION TONNES AND INCOME Ed FOR
WHEAT IS 0.6. IF PER CAPITA INCOME RISES BY 5%, ESTIMATE DEMAND
FOR WHEAT.
Income elasticity of demand = 0.6
5% increase in income will lead to 3% increase in demand for wheat
3% increase on 50 million = 1.5 million
Estimated demand = 51.5 million
PRICE Ed FOR A CERTAIN COMMODITY IS - 0.5 AND INCOME
Ed FOR THE SAME PRODUCT IS + 0.75. IF INCOME OF A
CONSUMER INCREASES BY 20% AND AT THE SAME TIME,
THE PRICE OF THIS PRODUCT FALLS BY 10%, FIND THE NEW
DEMAND FOR THE PRODUCT.
SOLUTION : - 4
Income elasticity of demand = + 0.75
20% increase in income will lead to 15% increase in demand
Price elasticity of demand = - 0.5
Demand will INCREASE by 5% as a result of 5% fall in price
+
Demand will rise by 20%
SOLUTION : - 5
PRICE Ed FOR A CERTAIN COMMODITY X IS - 0.6 WHILE CROSS ELASTICITY
WITH RESPECT TO THE PRICE OF THE PRODUCT Y IS + 1.2, IF THE SELLER
OF COMMODITY Y REDUCES THE PRICE OF Y BY 10%, WHAT PRICING
DECISION SHOULD BE TAKEN BY THE FIRM SELLING X SO AS TO KEEP THE
SALES VOLUME OF X UNCHANGED?
Cross elasticity of demand for X w.r.t. price of Y = + 1.2
10% reduction in price of Y will cause 12% reduction in demand for X
In order to keep sales volume unchanged, demand for X should rise by 12%
Price elasticity of demand = - 0.6
20% reduction in the price will help to push up demand by 12%
The price of X should be reduced by 20%
SOLUTION : - 6
CROSS Ed FOR CADBURY w.r.t. TO THE PRICE OF KITKAT IS + 0.5 WHEREAS
DEMAND FOR CADBURY IS UNITARY ELASTIC. THE PRICE OF KITKAT IS REDUCED
FROM Rs. 10 TO Rs. 8, SO THE PRICE OF CADBURY IS BROUGHT DOWN FROM
Rs.15 TO Rs.12. WHAT WILL BE THE CHANGE IN DEMAND FOR CADBURY?
The price of Kitkat is reduced from Rs.10 to Rs.8 i.e. 20% reduction
Cross elasticity of demand for Cadbury w.r.t. price of Kitkat = + 0.5
20% reduction in price of Kitkat will reduce demand for Cadbury by 10%
Cadbury reduces price from Rs. 15 to Rs. 12 i.e. 20% reduction
Demand for Cadbury is unitary elastic i.e. 1
20% reduction in price will push up its demand by 20%
NET EFFECT IS 10% RISE IN DEMAND FOR CADBURY
doc_428794326.pptx
Q.1 REDUCTION IN THE PRICE OF LAPTOP FROM Rs. 30,000 FROM Rs. 28,000
PUSHED UP DEMAND FROM 4000 UNITS TO 7000 UNITS. FIND ARC Ed .
Q. 2 10% INCREASE IN THE ADVERTISEMENT EXPENDITURE CAUSES 4%
INCREASE IN THE SALES VOLUME. WHAT IS THE PROMOTIONAL
EALASTICITY OF DEMAND?
Q. 3 DEMAND FOR WHEAT IS 50 MILLION TONNES AND INCOME Ed FOR
WHEAT IS 0.6. IF PER CAPITA INCOME RISES BY 5%, ESTIMATE DEMAND
FOR WHEAT.
Q. 4 PRICE Ed FOR A CERTAIN COMMODITY IS - 0.5 AND INCOME
Ed FOR THE SAME PRODUCT IS + 0.75. IF INCOME OF A
CONSUMER INCREASES BY 20% AND AT THE SAME TIME,
THE PRICE OF THIS PRODUCT FALLS BY 10%, FIND THE NEW
DEMAND FOR THE PRODUCT.
Q.5 PRICE Ed FOR A CERTAIN COMMODITY X IS - 0.6 WHILE CROSS ELASTICITY
WITH RESPECT TO THE PRICE OF THE PRODUCT Y IS + 1.2, IF THE SELLER
OF COMMODITY Y REDUCES THE PRICE OF Y BY 10%, WHAT PRICING
DECISION SHOULD BE TAKEN BY THE FIRM SELLING X SO AS TO KEEP THE
SALES VOLUME OF X UNCHANGED?
Q.6 CROSS Ed FOR CADBURY w.r.t. TO THE PRICE OF KITKAT IS + 0.5
WHEREAS DEMAND FOR CADBURY IS UNITARY ELASTIC. THE PRICE
OF KITKAT IS REDUCED FROM Rs. 10 TO Rs. 8, SO THE PRICE OF CADBURY
IS BROUGHT DOWN FROM Rs.15 TO Rs.12. WHAT WILL BE THE CHANGE
IN DEMAND FOR CADBURY?
Q.7 A MANAGER BELIEVES THAT THE DEMAND FOR HIS PRODUCT IS GIVEN
BY THE EQUATION P = 50 – Q/100. FIND Ed IF PRICE CHANGES FROM Rs. 10
TO Rs. 12.
Q.8 A MARKET CONSISTS OF TWO INDIVIDUALS. THEIR DEMAND EQUATIONS ARE
Q
1
= 100 – 4P ; Q
2
= 80 – 2P. FIND;
a] MARKET DEMAND FUNCTION
b] Ed FOR THE PRODUCT IN THE MARKET WHEN PRICE RISES FROM Rs. 10
TO Rs. 15.
Q.9 WHEN INCOME OF A HOUSEHOLD WAS Rs. 10,000, IT PURCHASED
5 kg. OF A PARTICULAR GOOD. ITS INCOME INCREASES FROM
Rs. 10,000 TO Rs. 12500 AND AT THE SAME TIME, THE PRICE OF THE
SUBSTITUTE OF THIS GOOD REDUCES FROM Rs. 20 TO Rs. 16.
ESTIMATE THE NEW DEMAND FOR THIS GOOD. GIVEN THAT INCOME
Ed = + 1.2 & CROSS Ed w.r.t. THE SUBSTITUTE = + 0.8.
Price of X Price of Y Income Demand (x) Demand (Y)
10
10
12
9
12
12
12
15
15
14
17
15
15000
16000
15000
17000
15000
16000
80
120
90
90
110
108
60
40
30
40
20
50
Q.10
CALCULATE : 1] Price elasticity of demand for X
2] Price elasticity of demand for Y
3] Income elasticity of demand for X
4] Cross elasticity demand for X w.r.t. Price of Y
SOLUTION : - 1
REDUCTION IN THE PRICE OF LAPTOP FROM Rs. 30,000 FROM Rs. 28,000
PUSHED UP DEMAND FROM 4000 UNITS TO 7000 UNITS. FIND ARC Ed .
ARC Ed = (?D/?P) * (P
1
+ P
2
)/(D
1
+ D
2
)
?D = +3000, ?P = -2000, (P
1
+ P
2
) = 58000, (D
1
+D
2
) = 11000
ARC Ed = (+3/-2)* (58000/11000) = - 7.9
10% INCREASE IN THE ADVERTISEMENT EXPENDITURE CAUSES 4%
INCREASE IN THE SALES VOLUME. WHAT IS THE PROMOTIONAL
EALASTICITY OF DEMAND?
SOLUTION : - 2
Promotional Ed =
% change in advertisement expenditure
% change in sales volume
= 4/10 = +0.4
SOLUTION : - 3
DEMAND FOR WHEAT IS 50 MILLION TONNES AND INCOME Ed FOR
WHEAT IS 0.6. IF PER CAPITA INCOME RISES BY 5%, ESTIMATE DEMAND
FOR WHEAT.
Income elasticity of demand = 0.6
5% increase in income will lead to 3% increase in demand for wheat
3% increase on 50 million = 1.5 million
Estimated demand = 51.5 million
PRICE Ed FOR A CERTAIN COMMODITY IS - 0.5 AND INCOME
Ed FOR THE SAME PRODUCT IS + 0.75. IF INCOME OF A
CONSUMER INCREASES BY 20% AND AT THE SAME TIME,
THE PRICE OF THIS PRODUCT FALLS BY 10%, FIND THE NEW
DEMAND FOR THE PRODUCT.
SOLUTION : - 4
Income elasticity of demand = + 0.75
20% increase in income will lead to 15% increase in demand
Price elasticity of demand = - 0.5
Demand will INCREASE by 5% as a result of 5% fall in price
+
Demand will rise by 20%
SOLUTION : - 5
PRICE Ed FOR A CERTAIN COMMODITY X IS - 0.6 WHILE CROSS ELASTICITY
WITH RESPECT TO THE PRICE OF THE PRODUCT Y IS + 1.2, IF THE SELLER
OF COMMODITY Y REDUCES THE PRICE OF Y BY 10%, WHAT PRICING
DECISION SHOULD BE TAKEN BY THE FIRM SELLING X SO AS TO KEEP THE
SALES VOLUME OF X UNCHANGED?
Cross elasticity of demand for X w.r.t. price of Y = + 1.2
10% reduction in price of Y will cause 12% reduction in demand for X
In order to keep sales volume unchanged, demand for X should rise by 12%
Price elasticity of demand = - 0.6
20% reduction in the price will help to push up demand by 12%
The price of X should be reduced by 20%
SOLUTION : - 6
CROSS Ed FOR CADBURY w.r.t. TO THE PRICE OF KITKAT IS + 0.5 WHEREAS
DEMAND FOR CADBURY IS UNITARY ELASTIC. THE PRICE OF KITKAT IS REDUCED
FROM Rs. 10 TO Rs. 8, SO THE PRICE OF CADBURY IS BROUGHT DOWN FROM
Rs.15 TO Rs.12. WHAT WILL BE THE CHANGE IN DEMAND FOR CADBURY?
The price of Kitkat is reduced from Rs.10 to Rs.8 i.e. 20% reduction
Cross elasticity of demand for Cadbury w.r.t. price of Kitkat = + 0.5
20% reduction in price of Kitkat will reduce demand for Cadbury by 10%
Cadbury reduces price from Rs. 15 to Rs. 12 i.e. 20% reduction
Demand for Cadbury is unitary elastic i.e. 1
20% reduction in price will push up its demand by 20%
NET EFFECT IS 10% RISE IN DEMAND FOR CADBURY
doc_428794326.pptx