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Workshop 2: Markets in Action

  1. Answer the following questions on the price elasticity of demand:
    1. The price elasticity of demand measures the responsiveness of the quantity demanded / price to a change in the quantity demanded / the quantity supplied / price. Delete the words (in bold) which are incorrect.
    2. Give the formula for price elasticity of demand.


  2. In the mid 1990s, the government in the UK announced that for every 10 per cent rise in the price of cigarettes, the demand is likely to fall by 6%. If this information is correct, what is the value of the price elasticity of demand for cigarettes?


  3. In each of the following pairs, decide which of the two items is likely to have the more elastic demand. Give reasons for your answer.
    1. Petrol (all brands) and Esso petrol


    2. Holidays abroad and Bread


    3. Salt and Clothing



  4. The formula for price elasticity of demand is as follows:

    Proportionate (or percentage) change in quantity demanded
    Proportionate (or percentage) change in price

    This can be summarised as: (Change in Qd / mid Qd) ÷ (Change in P / mid P)

    The following table shows the quantity of a product demanded at two different prices:

    PQd
    1625
    1435

    1. Calculate the proportionate change in quantity demanded when price falls from £16 to £14. (Use the first part of the formula, i.e. Change in Qd / mid Qd, to do your calculation.)


    2. Calculate the proportionate change in price when price falls from £16 to £14. (Use the first part of the formula, i.e. Change in P / mid P, to do your calculation.)


    3. What is the price elasticity of demand between £16 to £14?



  5. The following diagram shows two demand curves that cross at a price of P0.

    Two demand curves that cross

    Which of the following statements are true?

    1. Curve D1 is inelastic and curve D2 elastic. True / False
    2. Demand is more elastic between P0 and P1 along curve D2 than along curve D1. True / False
    3. The price elasticity of demand between P0 and P1 in the case of curve D2 is equal to:

      Q2 - Q0   P0 - P1
      		 ÷
      mid Q   mid P
      True / False
    4. For any given change in price there will be a larger proportionate change in quantity along curve D1 than along curve D2. True / False

  6. Fill in the rest of the following table:

    (For the final column use the formula: (Change in Qd / mid Qd) ÷ (Change in P / mid P)

    Quantity demanded (000s) Price(£) Total consumer expenditure Elastic or inelastic demand Price elasticity of demand
    7 13 ...    
    9 11 ... }--- ---
    11 9 ... }--- ---
    13 7 ... }--- ---

  7. Answer the following:
    1. What is the formula for income elasticity of demand?

    2. Which of the following would you expect to have a demand which is elastic with respect to income? (There is more than one.)
      1. Flour. Yes / No / Possibly
      2. Ready-prepared meals for the microwave. Yes / No / Possibly
      3. Champagne. Yes / No / Possibly
      4. Socks. Yes / No / Possibly
      5. Designer jeans. Yes / No / Possibly
      6. Electricity. Yes / No / Possibly
      7. Bus journeys. Yes / No / Possibly
      8. Insurance. Yes / No / Possibly