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STUDENT ID
NAME
ECO415 ECONOMICS - INDIVIDUAL EXERCISE
BACHELOR IN ACCOUNTANCY AC220
FACULTY OF ACCOUNTING
DATE OF SUBMISSION:
PROFESOR MADYA
ACKNOWLEDGEMENT
ECO415 lecturer, Profesor
for her guidanceand teachings during this course that has assisted me in completin
Last but not least, I would like to thank my
assignment. I would also like to thank my family members for their undying support.
Alhamdulillah, praise Allah SWT for giving me the energy, strength, and time to complete this
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g this assignment.
Price elasticity of demand
QUESTION
.
1
2.
3.
Price
0
P
2
3
20
Quantity D
1
P
5
2
25
0
Q
20
60
350
1
P
5
2
35
0
Q
20
80
150
Q1
5
1
100
270
Price elasticity of supply
QUESTION
.
1
2.
3.
Price
0
P
2
4
30
Quantity S
1
Q
35
55
180
Cross elasticity of demand
QUESTION
.
1
2.
Price
Px 0
2
4
Quantity D
Px 1
5
2
y 0
Q
30
70
Ix 1
6,000
8,000
y 0
Q
30
70
y 1
Q
45
80
Income elasticity of demand
QUESTION
.
1
2.
Income
Ix 0
3,000
6,000
Quantity D
y 1
Q
45
45
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PRICE ELASTICITY OF DEMAND
1. Ed = (%▲Q) / (%▲P) = (▲Q/▲P) x (P0/Q0)
Ed = ((15-20)/(5-2)) x (2/20) = -5/30 = -0.1667 (minusis ignored)
This denotes “InelasticDemand”.AsEd is0.1667%,lessthan1%,apercentagechangein
rice produces a smaller percentage change in quantity demanded.
p
In the above exercise, with Ed at 0.1667%, less than 1%, it signifies a situation where a
percentage change in price results in a proportionately smaller percentage change in
quantity demanded. Inelastic demandsuggeststhatconsumersarerelativelyunresponsive
to price changes, meaning that price variations have a limited impact on the quantity of
goods or services demanded.
2. Ed = (%▲Q) / (%▲P) = (▲Q/▲P) x (P0/Q0)
Ed = ((100-60)/(3-1)) x (1/60) = 4/12 = 0.3333
This denotes “Inelastic Demand”. As Ed is less than 1%, a percentage change in price
roduces a smaller percentage change in quantity demanded.
p
In the above exercise, Ed is calculated as 0.3333, indicating inelastic demand. The
interpretationofthisresultisthatapercentagechangeinpriceleadstoasmallerpercentage
change in quantity demanded. In this case, the low Ed value (0.3333) signifies that
consumers are relatively unresponsive to price fluctuations, characteristic of inelastic
demand. For instance, when the price increases by 1%, the quantity demanded only
decreases by0.3333%.Thisinsightiscrucialinunderstandingthedynamicsofsupplyand
demand, helping businesses and policymakers predict and respond to changes in market
conditions. Inelastic demand suggests that consumers arelesssensitivetopricechanges,
impacting the overall elasticity of supply and influencing market equilibrium.
3. Ed = (%▲Q) / (%▲P) = (▲Q/▲P) x (P0/ Q0)
Ed = ((350-270)/(25-20)) x (20/270) = 32/27 = 1.1851
This denotes an “Elastic Demand”. As Ed is more than 1%, a percentage change inprice
roduces a bigger percentage change in quantity demanded.
p
In the above exercise, Ed is calculated to be greater than 1%, indicating elastic demand.
Elastic demand implies that consumers are responsive to changes in price, with quantity
demanded exhibiting a larger percentage change than the corresponding percentage
change in price. Thisresponsivenessreflectsamoreelasticmarket,whereconsumersare
more sensitive to price fluctuations.
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PRICE ELASTICITY OF SUPPLY
1. Es = (%▲Q) / (%▲P) = (▲Q/▲P) x (P0/ Q0)
Es = ((15-20)/(5-2)) x (2/20) = -5/30 = -0.1667
In the above exercise, Es is determined to be -0.1667, indicating inelastic supply. The
negative sign signifies that the relationship between price and quantity supplied moves in
oppositedirections,adheringtothelawofsupply.Themagnitudeof-0.1667,beinglessthan
1%,suggeststhatsuppliersarerelativelyunresponsivetopricechanges.Inpracticalterms,
a 1% increase in price leads to a proportionately smaller 0.1667% decrease in quantity
supplied. Inelastic supply implies that producers are less sensitive to changes in price,
impacting the overall elasticity of the supply curve in the market.
2. Es = (%▲Q) / (%▲P) = (▲Q/▲P) x (P0/ Q0)
Es = ((100-60)/(3-1)) x (1/60) = 4/12 = -0.3333
In the above exercise, Es is determined to be -0.3333, indicating inelastic supply. The
negative sign denotes that the relationship between price and quantity supplied moves in
oppositedirections,adheringtothelawofsupply.Themagnitudeof-0.3333,beinglessthan
1%, suggests that suppliers arerelativelyunresponsivetopricechanges.Practically,a1%
increase in price results in a proportionately smaller 0.3333% increase in quantity supplied.
Inelastic supply implies that producers are less sensitive to changes in price, impacting
decisions related to production levels, resource allocation, and overall market equilibrium.
3. Es = (%▲Q) / (%▲P) = (▲Q/▲P) x (P0/ Q0)
Es = ((350-270)/(25-20)) x (20/270) = 32/27 = 1.1851
In theaboveexercise,Es isdeterminedtobe1.1851,indicatingelasticsupply.Thepositive
sign signifies that the relationship between price andquantitysuppliedmovesinthesame
direction,consistentwiththelawofsupply.Themagnitudeof1.1851,beinggreaterthan1%,
suggeststhatsuppliersarerelativelyresponsivetopricechanges.Practically,a1%increase
in price results in a proportionately larger 1.1851% increase in quantity supplied. Elastic
supplyimpliesthatproducersaresensitivetochangesinprice,influencingdecisionsrelated
to production levels, resource allocation, and overall market equilibrium. Understanding
supply elasticity is crucial for effective market analysis and decision-making.
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CROSS ELASTICITY OF DEMAND
1. EX Y = (%▲Qy) / (%▲Px) = (▲Qy/ ▲Px) x (P0x/Q0y)
EX Y = ((45-30)/(5-2)) x (2/30) = 1/3 = 0.3333
Intheaboveexercise,EXY iscalculatedas0.3333,indicatingapositivecrosselasticity.The
positive sign implies that the goods X and Y are substitutes – an increase in the price of
productXleadstoaproportionatelysmallerincreaseinthequantitydemandedofproductY.
Inpracticalterms,a1%increaseinthepriceofXcorrespondstoa0.3333%increaseinthe
quantity demanded ofY.
Inthecaseofsubstitutes,apositivecrosselasticitysuggeststhatconsumersareresponsive
to changes in prices between the two goods, impacting consumption patterns andmarket
dynamics.
Possible examples of butter and margarine, tea and coffee, and beef and chicken.
2. EX Y = (%▲Qy) / (%▲Px) = (▲Qy/ ▲Px) x (P0x/Q0y)
EX Y = ((80-70)/(2-4)) x (2/30) = 2/-7 = -0.2857
Intheaboveexercise,EXY iscalculatedas-0.2857,indicatinganegativecrosselasticity.The
negativesignimpliesthatgoodsXandYarecomplements–asthepriceofXincreases,the
quantitydemandedforYdecreasesproportionately.Practically,a1%increaseinthepriceof
Xcorresponds to a 0.2857% decrease in the quantitydemanded ofY.
In the case of complements, a negative cross elasticity suggests an inverse relationship,
impacting consumption patterns and market dynamics as consumers adjust their
preferences based on changes in prices.
ossible examples of complement goods are cars and petrol, printer and printer ink
P
cartridge, and coffee and sugar/creamer.
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INCOME ELASTICITY OF DEMAND
1. EX Y = (%▲Qy) / (%▲Ix) = (▲Qy/ ▲Ix) x (I0x/Q0y)
EX Y = ((45-30)/(6000-3000)) x (3000/30) = 1/2 = 0.5
In the above exercise calculation,EX Y isdeterminedtobe0.5,indicatingapositiveincome
elasticity. The positive sign suggests that good Yisanormalgood–asconsumerincome
increases, the quantity demanded for Y increasesproportionately.Inpracticalterms,a1%
increase in income corresponds to a 0.5% increase in the quantity demanded ofY.
or normal goods, apositiveincomeelasticityimpliesthatconsumersconsiderYanormal
F
partoftheirconsumptionbasketandaremorelikelytopurchasemoreofitastheirincome
rises, influencing market dynamics and consumer behavior.
xamples of normal goods arehighendrestaurants,highendelectricalproducts,branded
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goods, and new cars.
2. EX Y = (%▲Qy) / (%▲Ix) = (▲Qy/ ▲Ix) x (I0x/Q0y)
EX Y = ((45-70)/(8000-6000)) x (6000/70) = -15/14 =-1.0714
Intheaboveexercisecalculation,EX Y iscalculatedas-1.0714,reflectinganegativeincome
elasticity.ThenegativesignsuggeststhatgoodYisaninferiorgood–asconsumerincome
increases, thequantitydemandedforYdecreasesproportionately.Inpracticalterms,a1%
increase in income corresponds to a 1.0714% decrease in the quantity demanded ofY.
In the case of inferior goods, a negative income elasticity implies that as consumers'
incomes rise, they tend to shift their preferences toward more desirable or higher-quality
alternatives, impacting market dynamics and influencing consumption patterns.
xamples of inferior goods are cabbages, used clothing, none branded electronics, and
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basic entry-level mobile phones.
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