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Question
State whether the following statement are TRUE and FALSE.
1. Demand for luxuries is elastic.
2. Perfectly inelastic demand curve is parallel to the X axis.
3. Total outlay is price multiplied by quantity.
4. Unitary Elastic Demand rarely occurs in practice.
5. Concept of Elasticity of Demand is useful for finance minister.
1. Demand for luxuries is elastic.
2. Perfectly inelastic demand curve is parallel to the X axis.
3. Total outlay is price multiplied by quantity.
4. Unitary Elastic Demand rarely occurs in practice.
5. Concept of Elasticity of Demand is useful for finance minister.
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Solution
1. TRUE
Luxuries are the goods which are not essential, rather, they are consumed for leisure or comfort purposes. For example, air conditioners, branded garments etc. The demand for such goods is highly responsive to the change in their price. A rise in their price reduces the demand for them and vice-versa. This is because in case, the price rises, the consumer can do away with these goods, on the other hand, when the price rises the consumer tends to demand more of such goods to increase his comfort level in living. Thus, such goods have elastic demand.
2. FALSE
Perfectly inelastic demand implies that the demand for the commodity is completely unresponsive to the change in the price of the commodity. That is, a change in price has no effect on the demand. A specific quantity of the good would be demanded no matter the price. In such cases, the demand curve is vertical line parallel to Y axis.
3. TRUE
Total outlay or total expenditure is a method of measuring price elasticity. Total expenditure of a good is defined as the product of its price and the quantity demanded at that price.
Algebraically,
Total Outlay = Price × Quantity Demanded
4. TRUE
Unitary elasticity implies that a certain percentage increase in price is offset by equal percentage decrease in demand. If price of a good rises by two times, then the demand for the good gets halved. Similarly, a percentage decrease in price is offset by an equal percentage increase in demand for the good. Such an exact behaviour rarely occurs in practice.
5. TRUE
Elasticity of demand helps in selecting goods and services that can be taxed and on which subsidy should be provided. Thus, the concept of elasticity of demand is used by the finance minister to determine the taxation policy and to fix subsidies.
Luxuries are the goods which are not essential, rather, they are consumed for leisure or comfort purposes. For example, air conditioners, branded garments etc. The demand for such goods is highly responsive to the change in their price. A rise in their price reduces the demand for them and vice-versa. This is because in case, the price rises, the consumer can do away with these goods, on the other hand, when the price rises the consumer tends to demand more of such goods to increase his comfort level in living. Thus, such goods have elastic demand.
2. FALSE
Perfectly inelastic demand implies that the demand for the commodity is completely unresponsive to the change in the price of the commodity. That is, a change in price has no effect on the demand. A specific quantity of the good would be demanded no matter the price. In such cases, the demand curve is vertical line parallel to Y axis.
3. TRUE
Total outlay or total expenditure is a method of measuring price elasticity. Total expenditure of a good is defined as the product of its price and the quantity demanded at that price.
Algebraically,
Total Outlay = Price × Quantity Demanded
4. TRUE
Unitary elasticity implies that a certain percentage increase in price is offset by equal percentage decrease in demand. If price of a good rises by two times, then the demand for the good gets halved. Similarly, a percentage decrease in price is offset by an equal percentage increase in demand for the good. Such an exact behaviour rarely occurs in practice.
5. TRUE
Elasticity of demand helps in selecting goods and services that can be taxed and on which subsidy should be provided. Thus, the concept of elasticity of demand is used by the finance minister to determine the taxation policy and to fix subsidies.
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