Introductory Economics 2019, Student Tutorial Guide

TOPIC L3
Lecture Outline: ELASTICITY

Price elasticity of demand

- meaning
- measurement
- determinants
- relationship with total revenue
Income elasticity of demand
Price elasticity of supply
Samuel Baker from the University of South Carolina has created an interactive module which illustrates the
principle of elasticity of demand: http://sambaker.com/econ/elast/elast.html

L3 Workshop Questions, Chapter 3

1. [Textbook Problem 2.6, p.115]

A study of the price elasticities of products sold in supermarkets contained the following data:

PRODUCT PRICE ELASTICITY OF DEMAND Is it inelastic?

Soft drinks 3.18

Canned soup 1.62
Cheese 0.72
Toothpaste 0.45

a. The demand for which products is inelastic? Discuss reasons why the demand for
each product is either elastic or inelastic.
b. Use the information in the table to predict the change in the quantity demanded for
each product following a 10 per cent price increase.

2. [Textbook Problem 3.3, p.116]

Use the following graph for Yolanda’s Frozen Yoghurt Stand to answer the questions that follow.
Figure 3.3

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Introductory Economics 2019, Student Tutorial Guide

a. Use the midpoint formula to calculate the price elasticity of demand for D1 between
point A and point C, and the price elasticity of demand for D2 between point A and
point B. Which demand curve is more elastic, D1 or D2? Briefly explain.
b. Suppose Yolanda is initially selling 200 cones per day at a price of $3.00 per cone. If
she reduces her price to $2.50 per cone and her demand curve is D1, what will be
the change in her revenue? What will be the change in her revenue if her demand
curve is D2?

3. [Based on Textbook Problem 6.7, p.118]

On most days, the price of a rose is $6 and 10,000 roses are purchased. On Valentine’s Day, the
price of a rose jumps to $16 and 100,000 roses are purchased.
a. Draw a demand and supply diagram that shows why the price jumps.
b. Based on this information, what do we know about the price elasticity of demand
for roses? Calculate values for the price elasticity of demand and the price elasticity
of supply or explain why you can’t calculate these values.

4. [Textbook Problem 4.7, p.117]

Rank the following four goods from lowest income elasticity of demand to highest income
elasticity of demand. Briefly explain your ranking.
a. Bread
b. Pepsi
c. Mercedes-Benz cars
d. Personal computers

5. Study the list of determinants of price elasticity of demand in the table below, and then
do the following activity:

Determinants of price Elastic Inelastic

elasticity of demand
Availability of close
Many substitutes/alternatives Few substitutes/alternatives
substitutes
More time that passes, e.g. people
Length of time Less time that passes, e.g. people
buy more fuel-efficient cars over
involved don’t buy a new car frequently.
time.
Necessities and Necessities (for life itself; habit-
Luxuries
luxuries (goods) forming goods)

Definition of the More specific markets or brands (i.e. market in general (i.e. when
market when more substitutes are available) substitutes are not readily available)

Proportion of income
spent on the good Large proportion, e.g. furniture Small proportion, e.g. salt
(cheap/expensive)
Indicate for each pair of goods below which good has the more elastic price demand and why:
a. fast food; pizza
b. Shell petrol; petrol
c. champagne; beer
d. male haircuts; female haircuts

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