Elasticity is an important concept in

economics because it helps us understand

how consumers and producers react to
changes in prices, incomes, or other factors
that affect the demand and supply of goods
and services. By learning elasticity, you can
analyze the effects of various policies, such
as taxes, subsidies, price controls, or trade
barriers, on the market outcomes and

Microeconomics -1 welfare of different groups. Elasticity also

helps you evaluate the optimal pricing
strategies for firms that operate in different
(ECO-111) market structures.

Chapter 3: Elasticity: The Hasibul Hasan Nayem

Responsiveness of Demand and Supply 69th Batch
Course: Microeconomics -1 (ECO-111)
Course Teacher: ARS
A Note By: Hasibul Hasan Nayem

( 2111042116 ; 69th Batch )

Department of Economics

Chapter 3: Elasticity: The Responsiveness of Demand and Supply

Question 1: What is Price elasticity of demand? How Price elasticity of demand is measured? [2017]
Answer: Price elasticity of demand is the responsiveness of the quantity demanded to a change in
price, measured by dividing the percentage change in the quantity demanded of a product by the
percentage change in the product’s price.
The price elasticity of demand is measured by dividing the percentage change in the quantity
demanded by the percentage change in the product’s price.

𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒒𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒅𝒆𝒎𝒂𝒏𝒅𝒆𝒅

𝑷𝒓𝒊𝒄𝒆 𝒆𝒍𝒂𝒔𝒕𝒊𝒄𝒊𝒕𝒚 𝒐𝒇 𝒅𝒆𝒎𝒂𝒏𝒅 =
𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒄𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒑𝒓𝒊𝒄𝒆

Question 2: Price elasticity of demand is not the same as the slope of the

demand curve. Explain.

Answer: Though the slope of the demand curve tells us how much quantity changes as price changes,
but this approach has a drawback: The measurement of slope is sensitive to the units chosen for
quantity and price. To avoid this confusion over units, economists use percentage changes when
measuring the price elasticity of demand. Percentage changes are not dependent on units of
measurement.
Question 3: Why the price elasticity of demand is always negative?

Answer: If we calculate the price elasticity of demand for a price cut, the percentage change in price
will be negative, and the percentage change in quantity demanded will be positive. Similarly, if we
calculate the price elasticity of demand for a price increase, the percentage change in price will be
positive, and the percentage change in quantity demanded will be negative. Therefore, the price
elasticity of demand is always negative.

HASIBUL HASAN NAYEM 1

Question 4: Why economists use midpoint formula?
Or, What is midpoint method for calculating price elasticity of demand? What advantage does the
method have? [2016]
Answer: The midpoint method uses the average or the midpoint between two data points to calculate
the percent change in the price of a good and its percent change in quantity supplied or demanded.We
can use the midpoint formula to ensure that we have only one value of the price elasticity of demand
between the same two points on a demand curve. The midpoint formula uses the average of the initial
and final quantities and the initial and final prices. If Q1 and P1 are the initial quantity and price, and Q2
and P2 are the final quantity and price, the midpoint formula is:

The advantage of the midpoint method is that one obtains the same elasticity between two price
points whether there is a price increase or decrease. In other words, it avoids the problem of getting a
different answer when we computer price elasticity between any two points on a demand curve.

Question 5: Define: Elastic demand, inelastic demand, unit elastic demand, perfectly elastic and
perfectly inelastic demand. [2013]

Or, Define Price elasticity of demand. Discuss the nature of demand when the values of demand
elasticities are 1, greater than 1, less than 1, zero and infinity. [2014]

Answer: Elastic Demand: Elastic demand is the case where the percentage change in quantity
demanded is greater than the percentage change in price, so the price elasticity is greater than 1 in
absolute value.
If the quantity demanded is very responsive to changes in price, the percentage change in quantity
demanded will be greater than the percentage change in price, and the price elasticity of demand will
be greater than 1 in absolute value. In this case, demand is elastic.

Inelastic demand: Inelastic demand is the case where the percentage change in quantity demanded is
less than the percentage change in price, so the price elasticity is less than 1 in absolute value.
When the quantity demanded is not very responsive to price, however, the percentage change in
quantity demanded will be less than the percentage change in price, and the price elasticity of demand
will be less than 1 in absolute value. In this case, demand is inelastic.

Unit elastic demand: Demand is unit elastic when the percentage change in quantity demanded is
equal to the percentage change in price. The price elasticity is equal to one in absolute value.

HASIBUL HASAN NAYEM 2

Perfectly elastic demand and perfectly inelastic demand are the critical or extreme or polar cases of
elasticity. [2017]

Perfectly elastic demand: If a demand curve is a horizontal line, it is perfectly elastic. In this case, the
quantity demanded is infinitely responsive to price, and the price elasticity of demand equals infinity. If
a demand curve is perfectly elastic, an increase in price causes the quantity demanded to fall to zero.
Perfectly inelastic demand: If a demand curve is a vertical line, it is perfectly inelastic. In this case, the
quantity demanded is completely unresponsive to price, and the price elasticity of demand equals zero.
No matter how much price may increase or decrease, the quantity remains the same. For only a very
few products will the quantity demanded be completely unresponsive to the price, making the demand
curve a vertical line. The drug insulin is an example.

HASIBUL HASAN NAYEM 3

Question 6: When demand curves intersect, the flatter curve is more elastic. Explain.
Answer: Elasticity is not the same thing as slope. While slope is calculated using changes in quantity
and price, elasticity is calculated using percentage changes. But it is true that if two demand curves
intersect:
i. The demand curve with the smaller slope (in absolute value)—the flatter demand curve—is
more elastic.
ii. The demand curve with the larger slope (in absolute value)—the steeper demand curve—is
less elastic.

Question 7: Show that elasticity is not constant along a linear demand curve. [2019]
Answer: Even though the slope of a linear demand curve is constant, the elasticity is not. This is true
because the slope is the ratio of changes in the two variables, whereas the elasticity is the ratio of
percentage changes in the two variables.

Question 8: What determines price elasticity of demand?

Answer: The key determinants of the price elasticity of demand are:
i. Availability of Close Substitutes: If a product has more substitutes available, it will have a
more elastic demand. If a product has fewer substitutes available, it will have a less elastic
demand.
ii. Passage of Time: The more time that passes, the more elastic the demand for a product
becomes.
iii. Luxuries versus Necessities: Goods that are luxuries usually have more elastic demand
curves than goods that are necessities. The demand curve for a luxury is more elastic than
the demand curve for a necessity.
iv. Definition of the Market: In a narrowly defined market, consumers have more substitutes
available. The more narrowly we define a market, the more elastic demand will be.

HASIBUL HASAN NAYEM 4

 v. Share of a Good in a Consumer’s Budget: Goods that take only a small fraction of a
consumer’s budget tend to have less elastic demand than goods that take a large fraction.
The demand for a good will be more elastic the larger the share of the good in the average
consumer’s budget.
vi. Addictiveness: Addictive products like alcohol and tobacco tend to be more inelastic,
because consumers are more likely to purchase them no matter the price.

Question 9: What is the relationship between price elasticity and total revenue? Describe briefly.
[2018]
Answer: Total revenue is the total amount of funds a seller receives from selling a good or service,
calculated by multiplying price per unit by the number of units sold.
i. When demand is inelastic, price and total revenue move in the same direction: An increase
in price raises total revenue, and a decrease in price reduces total revenue.
ii. When demand is elastic, price and total revenue move inversely: An increase in price
reduces total revenue, and a decrease in price raises total revenue.
iii. When demand is unit elastic, total revenue is maximized.

When demand is elastic, the quantity effect outweighs the price effect, meaning if we decrease prices,
the revenue gained from the more units sold will outweigh the revenue lost from the decrease in price.
When demand is inelastic, the price effect outweighs the quantity effect, meaning if we increase prices,
the revenue gained from the higher price will outweigh the revenue lost from less units sold.

HASIBUL HASAN NAYEM 5

Question 10: What is Cross-Price Elasticity of Demand? How would you use this elasticity to
distinguish between substitutes and complementary goods? [2018]
Or, Define the Cross-Price Elasticity of Demand. What does it mean if the Cross-Price Elasticity of
Demand is negative? What does it mean if the Cross-Price Elasticity of Demand is positive? [2020]
Or, What is Cross-Price Elasticity of Demand? Use the elasticity to distinguish between substitutes,
complements and unrelated products. [2016]

Answer: Cross elasticity of demand or cross-price elasticity of demand measures the percentage
change of the quantity demanded for a good to the percentage change in the price of another good,
ceteris paribus. In real life, the quantity demanded of good is dependent on not only its own price
(Price elasticity of demand) but also the price of other "related" products.

The cross-price elasticity of demand is positive or negative, depending on whether the two products
are substitutes or complements. A negative cross elasticity denotes two products that are
complements, while a positive cross elasticity denotes two products are substitutes.
An increase in the price of a substitute will lead to an increase in the quantity demanded, so the cross-
price elasticity of demand will be positive. An increase in the price of a complement will lead to a
decrease in the quantity demanded, so the cross-price elasticity of demand will be negative. Of course,
if the two products are unrelated—such as iPhones and peanut butter—the cross-price elasticity of
demand will be zero.

Question 11: Are the cross-price elasticities of demand between the following pairs of products likely
to be positive or negative or zero. Briefly explain. [2020]

i. Coffee and tea

ii. Rice and wheat
iii. Cell phone and maize
Answer: The cross-price elasticity of demand is positive or negative, depending on whether the two
products are substitutes or complements. A negative cross elasticity denotes two products that are
complements, while a positive cross elasticity denotes two products are substitutes. And if the two
products are unrelated—such as iPhones and peanut butter—the cross-price elasticity of demand will
be zero.

As coffee and tea are closely substitute goods, an increase in the price of tea will lead to an increase in
the quantity demanded of coffee, so the cross-price elasticity of demand will be positive.
As rice and wheat are closely substitute goods, an increase in the price of wheat will lead to an increase
in the quantity demanded of rice, so the cross-price elasticity of demand will be positive.
As cell phone and maize are unrelated goods, the cross-price elasticity of demand will be zero.

HASIBUL HASAN NAYEM 6

Question 12: Are the cross-price elasticities of demand between the following pairs of products likely
to be positive or negative or zero. Briefly explain. [2019] [2016]

i. Pepsi and coke

ii. Printer and cartridge
iii. Cell phone and tractor
Answer: The cross-price elasticity of demand is positive or negative, depending on whether the two
products are substitutes or complements. A negative cross elasticity denotes two products that are
complements, while a positive cross elasticity denotes two products are substitutes. And if the two
products are unrelated—such as iPhones and peanut butter—the cross-price elasticity of demand will
be zero.

As pepsi and coke are closely substitute goods, an increase in the price of coke will lead to an increase
in the quantity demanded of pepsi, so the cross-price elasticity of demand will be positive.
As printer and cartridge are complementary goods, an increase in the price of cartridge will lead to an
decrease in the quantity demanded of printer, so the cross-price elasticity of demand will be negative.

Question 13: What is Income Elasticity of Demand? How would you use this elasticity to distinguish
between normal and inferior goods?
Distinguish between normal and inferior goods using the concepts of Income elasticity of demand.
[2019] [2015]
Answer: Income elasticity of demand is a measure of the responsiveness of quantity demanded to a
change in income. Measured by the percentage change in quantity demanded divided by the
percentage change in income.

Depending on the values of the income elasticity of demand, goods can be broadly categorized as
inferior and normal goods. Normal goods are the goods whose demand goes up with the rise in
consumer's income. Inferior goods are the goods whose demand falls down with the rise in consumer's
income.

Normal goods whose income elasticity of demand is between zero and one are typically referred to as
necessity goods, which are products and services that consumers will buy regardless of changes in their
income levels. Examples of necessity goods and services include tobacco products, haircuts, water, and
electricity.
Furthermore, luxury goods are a type of normal good associated with income elasticities of demand
greater than one. Consumers will buy proportionately more of a particular good compared to a
percentage change in their income.

HASIBUL HASAN NAYEM 7

Inferior goods are whose income elasticity of demand is negative.
Inferior goods are associated with a negative income elasticity, while normal goods are related to a
positive income elasticity.

Question 14: What do you mean by Income Elasticity of Demand? From the following information,
calculate Income Elasticity of Demand and comment on the nature of the commodity. [2017]

Income (in thousand TK.) Demand (in KG.)

25 35
35 45

Answer: Income elasticity of demand is a measure of the responsiveness of quantity demanded to a

change in income. Measured by the percentage change in quantity demanded divided by the
percentage change in income.

35 − 45
Income elasticity of demand =
25 − 35
=1
Normal goods are associated with a positive income elasticity. Here the Income elasticity of demand is
1 (Positive). So, the good is normal good.

Question 15: Distinguish between elastic demand and inelastic demand. [2015] Suppose a linear
demand curve is given by the formula 𝑸 = 𝟒𝟎𝟎 − 𝟏𝟎𝑷. What is the price elasticity of demand at P =
30? At P = 10? Compare between the values of elasticity. [2020]

Answer: The differences between elastic demand and inelastic demand are the following :

Basis for the comparison Elastic demand Inelastic demand

Meaning When a little change in the Inelastic demand refers to a
price of a product results in a change in the price of a good
substantial change in the result in no or slight change in
quantity demanded, it is known the quantity demanded.
as elastic demand.
Elasticity Quotient More than equal to 1 Less than 1
Curve Shallow Steep
Price and Total revenue Move in the opposite direction Move in the same direction
Goods Comfort and luxury Necessity

HASIBUL HASAN NAYEM 8

Question 16: Is the demand for your cell phone call elastic or inelastic? Give arguments. [2019]
[2015]

Answer: The demand for cell phone calls is likely to be elastic, meaning that the quantity
demanded is sensitive to changes in price. This is because cell phone calls are not a necessity,
but rather a luxury good, and consumers have many alternatives available, such as texting,
emailing, or using social media apps. Therefore, if the price of cell phone calls increases,
consumers will reduce their demand and switch to other modes of communication. Conversely,
if the price of cell phone calls decreases, consumers will increase their demand and make more
calls.

Alternative Answer
The elasticity of demand for a cell phone call can vary depending on several factors, including the
specific circumstances and market conditions. Generally, the demand for cell phone calls can exhibit
both elastic and inelastic characteristics, and it depends on the context. Here are arguments for both
elastic and inelastic demand:

Elastic Demand for Cell Phone Calls:

1. Many Substitutes: If consumers have access to various substitutes for making calls, such as
using messaging apps, email, or other communication methods, the demand for cell phone calls
can be more elastic. When the price (cost per call) increases, consumers may readily switch to
alternative methods, reducing their demand for traditional cell phone calls.
2. Price Sensitivity: If consumers are highly price-sensitive and responsive to changes in call rates,
the demand is likely to be elastic. Small increases in call prices can lead to proportionally larger
decreases in the quantity of calls made.
3. Competitive Market: In a competitive market where multiple service providers offer similar
calling plans, consumers may have the flexibility to switch providers easily in response to
changes in prices or calling terms, making demand more elastic.

Inelastic Demand for Cell Phone Calls:

1. Necessity: Cell phone calls are often considered a necessity for many individuals and
businesses. In cases where cell phone calls are essential for communication, the demand tends
to be inelastic. People may continue to make calls even if prices rise because they perceive the
service as vital.
2. Lack of Close Substitutes: In areas with limited or no alternative communication methods, such
as remote regions or during emergencies, the demand for cell phone calls can be highly
inelastic. When no close substitutes are available, consumers have no choice but to pay the
prevailing rates.

HASIBUL HASAN NAYEM 9

 3. Addiction or Habit: Some individuals may have developed a strong habit or addiction to making
cell phone calls, especially for personal or business reasons. In such cases, the demand can be
inelastic because consumers are less likely to reduce their calling habits even if prices increase.
4. Emergency Situations: In emergency situations, the demand for cell phone calls can become
highly inelastic as people need to make calls urgently, regardless of the cost. During crises or
disasters, individuals are willing to pay any price to establish communication.

In conclusion, whether the demand for cell phone calls is elastic or inelastic depends on various factors,
including the availability of substitutes, price sensitivity, the competitive landscape, necessity, and
consumer habits. It's important to note that demand elasticity can vary from one situation to another
and from one group of consumers to another. Therefore, the elasticity of demand for cell phone calls is
not fixed and can change based on the specific context and market conditions.

Question 17: What do you mean by an inferior good? Is rice becoming an inferior good in
Bangladesh? [2018]

Answer: An inferior good is a good whose demand decreases when consumer income rises, unlike
normal goods, for which the opposite is observed. For example, when people have more money, they
may buy less instant noodles and more fresh food. Inferior goods are not necessarily of low quality, but
they have cheaper alternatives that people prefer when they can afford them.
Rice is a staple food in Bangladesh and it accounts for about 70% of the average daily calorie intake.
However, rice consumption per capita has been declining in recent years, as people diversify their diets
with more non-rice items such as wheat, meat, eggs, fruits and vegetables. This is partly due to
increased income, urbanization, health awareness and changing preferences.
However, this does not necessarily mean that rice is becoming an inferior good in Bangladesh. Rice
consumption may also be influenced by other factors such as population growth, food prices,
availability, quality, taste and culture. Rice is still a major source of food security and nutrition for
millions of people in Bangladesh, especially the poor and vulnerable. Rice consumption may also vary
depending on the season, the type and quality of rice, and the availability of other foods.
In summary, while rice is a staple food in Bangladesh and its consumption has historically remained
constant even as incomes have risen, whether it becomes an inferior good in the future would depend
on changing dietary preferences and consumer behaviors influenced by economic development and
cultural shifts.

HASIBUL HASAN NAYEM 10

Question 18: Is the demand for cigarettes is inelastic. Will an increase in the price of cigarette
increase or decrease the revenue gained by cigarette sellers?
Answer: Addictive products like alcohol and tobacco tend to be more inelastic, because consumers are
more likely to purchase them no matter the price.
The demand for cigarettes is inelastic, meaning that the quantity demanded does not change much in
response to changes in price. This implies that an increase in the price of cigarettes will increase the
revenue gained by cigarette sellers, since the percentage increase in price will be greater than the
percentage decrease in quantity. However, this also depends on other factors, such as the availability
of substitutes, the income level of consumers, and the health awareness of smokers. Some studies
have found that the demand for cigarettes is more elastic in developing countries than in developed
countries, and more elastic among low-income groups than high-income groups. This means that these
groups are more sensitive to price changes and will reduce their consumption more when the price of
cigarettes increases. Therefore, the effect of price increases on revenue may vary across different
markets and segments of consumers.

Question 19: “Rice is an inferior good to the rich while it is a normal good to the poor.” Do you agree
with the statement? Explain.
Question 20: What are the Determinants of the price elasticity of supply?

Answer:
i. Availability of resources
ii. Capacity of production – excess or at full capacity?
iii. Time involved to change production levels
iv. Short-run or long-run

Price elasticity of supply is the responsiveness of the quantity supplied to a change in price. It is
measured by dividing the percentage change in the quantity supplied of a product by the percentage
change in price.

The elasticity of supply will always be positive as price and quantity supplied always move in the same
direction.

“If you don’t like your destiny, don’t accept it. Instead have the
courage to change it the way you want it to be.”
– Naruto Uzumaki

HASIBUL HASAN NAYEM 11