Question

Using the concepts of price elasticity of demand (PED), cross elasticity of demand (XED) and Income elasticity demand(YED) discuss in details what kind of goods a cigarette with a price elasticity of demand of -4

Answer 1

PED implies the degree of responsiveness of the quantity demanded of a good due to change in its price.

XED implies the degree of responsiveness of the quantity demanded of one good due to change in the price of another good.

YED implies the degree of responsiveness of the quantity demanded of one good due to change in the income of the consumer

price elasticity of demand of Cigarettes = -4

% change in Quantity Demanded / % change in price = -4

So, % change in Quantity Demanded > % change in price

It implies that a 1 % increase in price will lead to fall in the quantity demanded by 4%

Hence, the demand for Cigarettes is said to be ELASTIC