Types of elasticity practise

Teacher notes

This page provides revision practise for the different types of elasticity - price elasticity of demand, price elasticity of supply, income elasticity of demand and cross price elasticity of demand.  Elasticity calculations would normally be found on the paper three (HL only paper) but this exercise is suitable for both SL and HL students.

Types of elasticity practise

The following short answer questions provide revision practise for the four types of elasticity - price elasticity of demand, price elasticity of supply, income elasticity of demand and a unit from the old syllabus - cross price elasticity of demand. 

In answering the following questions you should assume that as the price of a 4 pack of Heinz baked beans rises from $ 10 to $ 12.50, quantity demanded falls from 20,000 to 10,000 packs sold.

Questions

a. Use total revenue theory to test if the PED of baked beans is elastic or inelastic.

Using revenue theory the total revenue of the company falls from $200,000 to $125,000, making baked beans PED elastic. 

b. Calculate the PED of baked beans.

% change in QD = 50 / % change in price = 25 so PED = 2.

c. Calculate the PES for beans if following a rise in the price of the product, quantity supplied rises from 20,000 units sold to 50,000.

PES = 150 / 25 = 6

d. Explain why the total revenue test cannot be applied to price elasticity of supply?

The revenue test calculates the change in revenue after a change in price and when a firm changes its price there is no guarantee that all of the product will be sold.

e. Following a rise in the selling price of baked beans demand for potatoes rises.  Are baked beans and potatoes complimentary goods, substitute products or unrelated goods?

Substitute goods.

f. Assuming that following a rise in the price of beans demand for potatoes rises from 10,000 kgs sold to 20,000 kg, calculate the XED for the two products. 

100% / 25% = XED of 4.

g. Assuming that a rise in disposable incomes of 10% leads to a fall in quantity demanded for beans from 20,000 to 10,000, calculate the YED?

50% / - 10% = - 5 (i.e. an inferior good).

The questions can be printed as a PDF file at:  Elasticity practise

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