Question

A product increases the price 13% and reduced the quantity demanded in 3%. Calculate the elasticity. b. Indicate whether the curve is elastic, inelastic or unitary. c. Identify the type of product. d. Indicate whether the increase in price causes an increase or decrease in income total of the supplier and the reason.

Answer 1

Elasticity of demand = % Change in quantity demanded/% change in price

% Change in quantity demanded = -3%

% change in price = +13%

Hence elasticity of demand = -3%/13% = -0.2308

b)

This is an elastic demand as there is an opposite change in price and quantity demanded. Although it is not perfectly elastic.

c) This can be any common product such as essential FMCG product such as toothpaste. Here the price will increase considerably but the demand will fall much less.

d) Increase in price shall cause increase in income to supplier as the increase in price is much larger than the decrease in demand.