Q. Define elasticity of a good and differentiate between perfectly elastic and perfectly inelastic goods.

Ans. Elasticity is a measure, which helps in relating goods and the price of those goods, using
parameters like consumer demand, supply of goods and buyer’s power.

Perfectly elastic: When small change in price of goods leads to huge change in goods supplied or
distributed then such goods are called as perfectly elastic.

Perfectly Inelastic: When change in price of a good doesn’t lead to significant change in good’s
demand then such goods are known as perfectly inelastic goods. Such goods are necessities.

Q. Give examples for perfectly elastic and inelastic goods.

Ans. Examples of perfectly inelastic goods are the goods which cater to daily basic human needs such
as Food items, Clothing etc. These are perfectly inelastic since increase in the prices of food items
won’t lead to decline in the consumption of these food items.

Examples of perfectly elastic goods are the goods whose change in price leads to emergence of
cheaper alternatives. Few of such items are cosmetic products, airline tickets.

Q. What is the Law of Demand? Give a real life example for it.

Ans. Law of demand states that there is an inverse relation between the price of goods or services and
their demand, if all other factors are considered constant.

One of the real life examples of law of demand is the Sale of IPhone 5s.The phone was priced at INR
53,500 when it was launched and gradually due to high price, its sale declined. And recently, When
Apple decided to slash the price of IPhone 5s by almost 45%, a considerable increase in demand was
observed.

Q. Using the consumer and producer surplus theory, explain total surplus.

Ans. Consumer surplus is the difference actual purchase price of a product and the price the
consumer are willing to pay for the same product. Producer surplus on the other hand, is the
difference between the Actual purchase price of the product and economic cost incurred.

In the demand-supply equilibrium curve, equilibrium is achieved when the maximum price willingly
offered by consumer equals the least price willingly accepted by the seller. This equilibrium point
corresponds to equilibrium market price.

The area between the negative sloped demand curve and market price equals the consumer surplus
and the area between supply curve and market price is called producer surplus. The combined area of
consumer surplus and producer surplus is the total surplus. Since, Actual purchase price is common in
both , but with opposite signs, the total surplus can be expressed as the willing to Pay price of a
product and the economic cost of the product.

Q. Define the terms "Consumer Surplus" & "Producer Surplus”.

Ans. Consumer Surplus: It’s the hidden profit a consumer achieves, when he gets a product at a
relatively lower price than what he had actually thought/decided to spend, at max, on the same
product. Consumer surplus, thus, is the willingness to pay price minus the price for which a consumer
actually bought the product.

Producer Surplus: When a seller sells his goods at a price more than the cost price, which includes the
fixed post, variable cost and the opportunity cost of the seller, for a given amount of the good, the
difference between these two prices is called Producer Surplus.