RBSE Solutions Class 12 Economics Chapter 4 Price Elasticity of Demand

Rajasthan Board RBSE Class 12 Economics Chapter 4 Price Elasticity of Demand

RBSE Class 12 Economics Chapter 4 Practice Questions

RBSE Class 12 Economics Chapter 4 Multiple Choice Questions

 

Question 1. With increase in price, there is no change in demand of that commodity. This is called :
(a) perfectly inelastic
(b) unitary
(c) infinite
(d) perfectly elastic
Answer: (a) perfectly inelastic
In simple words: When the price goes up, but people buy the exact same amount of a product, we call this "perfectly inelastic" demand. The quantity demanded doesn't change at all, no matter the price.

🎯 Exam Tip: Remember that perfectly inelastic demand is a rare theoretical concept where demand is completely unresponsive to price changes.

 

Question 2. Due to increase in price in case of inelastic demand, what will be its effect on total expenditure of the consumer?
Answer: If demand is inelastic, an increase in price will lead to a smaller percentage decrease in quantity demanded. This results in an increase in the total expenditure of the consumer. They end up spending more overall because the quantity they reduce buying is not enough to offset the higher price per unit.
In simple words: When demand doesn't change much with price (inelastic), if the price goes up, people still buy almost the same amount, so they will spend more money in total.

🎯 Exam Tip: For inelastic demand, price and total expenditure move in the same direction. For elastic demand, they move in opposite directions.

 

Question 3. Formula for elasticity of demand by geometric method :
(a) Lower Sector of Demand Curve / Upper Sector of Demand Curve
(b) Upper Sector of Demand Curve / Lower Sector of Demand Curve
(c) \( \Delta Q/Q \)
\( \Delta P/P \)
(d) \( \Delta P/P \)
\( \Delta Q/Q \)
Answer: (a) Lower Sector of Demand Curve / Upper Sector of Demand Curve
In simple words: The geometric way to find out how much demand changes with price uses a simple rule: divide the lower part of the demand curve by its upper part from a specific point.

🎯 Exam Tip: The geometric method is also known as the point method, and it is useful for finding elasticity at a specific point on a linear demand curve.

 

Question 4. If price of "samosa” increases by 10% and its demand decreases to 10%, calculate the elasticity of demand.
(a) equal to unitary E_d
(b) Zero E_d
(c) greater than unitary E_d
(d) less than unitary E_d
Answer: (a) equal to unitary E_d
In simple words: If the price of samosa goes up by 10% and people buy 10% less, it means demand changes by the same percentage as the price. This is called unitary elasticity.

🎯 Exam Tip: Unitary elasticity occurs when the percentage change in quantity demanded is exactly equal to the percentage change in price, making the elasticity value 1.

 

Question 5. The elasticity of demand at point P in point method will be :
Answer: The elasticity of demand at point P, using the point method, is calculated as the ratio of the lower segment of the demand curve from point P to the upper segment of the demand curve from point P. The diagram shows point P between A and B on the demand curve, indicating that the elasticity will be less than infinite and greater than zero, possibly unitary, elastic, or inelastic depending on the position of P.
In simple words: To find how demand changes at point P, you divide the bottom part of the demand line by the top part of the demand line, measured from point P. This helps you see how sensitive demand is to price right at that spot.

🎯 Exam Tip: Remember that along a linear demand curve, elasticity changes from infinite at the top to zero at the bottom, with unitary elasticity at the midpoint.

RBSE Class 12 Economics Chapter 4 Very Short Answer Type Questions

 

Question 1. Define price elasticity of demand.
Answer: Price elasticity of demand measures how much the quantity demanded of a product changes when its price changes. It also considers changes in the price of related goods (substitutes and complements), how much money consumers have, and what consumers expect about future prices.
In simple words: It tells us how sensitive the demand for something is to a change in its price or other factors like incomes and related product prices.

🎯 Exam Tip: Always mention both the change in quantity demanded and the change in price, along with the "ceteris paribus" (all other things being equal) assumption when defining elasticity.

 

Question 2. If demand curve is parallel to X axis, find out elasticity of demand.
Answer: If a demand curve is parallel to the X-axis, it means that even a tiny change in price will cause an infinite change in the quantity demanded. This type of demand is called Perfectly Elastic Demand. In this situation, the elasticity of demand is considered to be infinity.
In simple words: When the demand line is flat, meaning parallel to the X-axis, it means people will buy endless amounts at a certain price, but nothing if the price goes up even a little. This is called perfectly elastic demand.

🎯 Exam Tip: A perfectly elastic demand curve is horizontal, indicating that consumers are willing to buy an unlimited quantity at a specific price, but none at a slightly higher price.

 

Question 3. What will be the elasticity of demand at the middle of demand curve?
Answer: At the very center of a demand curve, the elasticity of demand is exactly equal to one. This is also known as Unitary Elasticity of Demand. It means that the percentage change in quantity demanded is equal to the percentage change in price.
In simple words: In the middle of the demand curve, the demand changes by the same amount as the price. This is called unitary elasticity.

🎯 Exam Tip: Knowing the midpoint of a linear demand curve helps quickly identify where demand is unitary elastic.

 

Question 4. Why is elasticity of demand for water inelastic?
Answer: The demand for water is inelastic because it is a basic necessity for life. People cannot survive without water, so even if the price changes in the market, it does not significantly affect the quantity of water demanded. Everyone needs a certain amount of water regardless of its cost.
In simple words: Water demand does not change much with price because it's a must-have for survival. We need it no matter the cost.

🎯 Exam Tip: Goods that are necessities or have no close substitutes generally have inelastic demand, as consumers will continue to purchase them even if prices rise.

 

Question 5. Write the formula for finding out elasticity of demand by geometric method.
Answer: The formula for finding the elasticity of demand (E_d) by the geometric method, also known as the point method, is:
\( \text{Elasticity of demand} (E_d) = \frac{\text{Lower segment}}{\text{Upper segment}} = \frac{MB}{MA} \)
Here, MB represents the length of the lower segment from point M to B, and MA represents the length of the upper segment from point M to A.
In simple words: You find demand elasticity at a point by dividing the length of the demand curve below that point by the length of the demand curve above that point.

🎯 Exam Tip: This formula is specifically for calculating elasticity at a single point on a linear demand curve.

RBSE Class 12 Economics Chapter 4 Short Answer Type Questions

 

Question 2. Explain diagrammatically perfectly elastic and perfectly inelastic demand.
Answer:
(i) **Perfectly Elastic Demand**
A perfectly elastic demand curve is a horizontal line parallel to the X-axis (Quantity demanded). This shows that at a specific price (for example, Rs. 4), consumers will buy any quantity (10, 20, or 30 units, or even infinite). However, if the price increases even a tiny bit, the demand falls to zero. A very small price reduction would lead to infinite demand. In this case, the elasticity of demand (E_d) is infinite (\( \infty \)).
(Figure for perfectly elastic demand would show a horizontal demand curve DD at a price of Rs. 4, parallel to the X-axis, with quantity varying along the X-axis.)

(ii) **Perfectly Inelastic Demand**
A perfectly inelastic demand curve is a vertical line parallel to the Y-axis (Price). This indicates that the quantity demanded does not change at all, regardless of changes in price. For instance, if the price is Rs. 2, demand is for 4 units. If the price rises to Rs. 4 or Rs. 6, the demand still remains 4 units. Therefore, price changes have no effect on the quantity demanded. In this situation, the elasticity of demand (E_d) is zero.
(Figure for perfectly inelastic demand would show a vertical demand curve DD at 4 units of quantity, parallel to the Y-axis, with price varying along the Y-axis.)
In simple words: Perfectly elastic demand means people will buy endless amounts at one price but nothing if it goes up a bit; its line is flat. Perfectly inelastic demand means people buy the same amount no matter the price changes; its line is straight up and down.

🎯 Exam Tip: Clearly draw and label the axes (Price on Y, Quantity on X) and the demand curves for both cases, showing how perfectly elastic is horizontal and perfectly inelastic is vertical.

 

Question 3. How is elasticity of demand calculated by percentage method?
Answer: The percentage method, also called the proportionate method, is used to calculate the elasticity of demand. This approach was developed by Dr. Marshall. It calculates elasticity as the ratio of the percentage change in the quantity demanded to the percentage change in the price of the product. The formula for this is:
\( E_d = \frac{\text{Proportionate Change in Quantity Demanded}}{\text{Proportionate Change in Price}} = \frac{(Q_1 - Q) / Q}{(P_1 - P) / P} \)
Where:
E_d = price elasticity of demand
Q = initial demand
Q₁ = new demand
P = initial price
P₁ = new price
Note: The price elasticity of demand is typically expressed as a negative value, but for analysis, its absolute value is often used.
In simple words: To find demand elasticity using this method, you divide how much demand changes in percentage by how much the price changes in percentage. This tells you the ratio of their changes.

🎯 Exam Tip: Always show the formula clearly and define all variables. Remember that price elasticity is usually negative, but the absolute value is used for comparison.

RBSE Class 12 Economics Chapter 4 Essay Type Questions

 

Question 1. Explain diagrammatically the different categories of elasticity of demand.
Answer: The elasticity of demand helps us understand how sensitive the quantity demanded of a product is to changes in its price. There are five main categories of price elasticity of demand, each explained diagrammatically below:

(i) **Perfectly Elastic Demand (\( E_d = \infty \))**
In this case, a very small change in price leads to an infinitely large change in quantity demanded. The demand curve is a horizontal straight line parallel to the X-axis (Quantity demanded). For example, at price Rs. 4, demand can be 10, 20, or 30 units, but if the price rises slightly, demand falls to zero. This is a theoretical concept, rarely seen in real life.
(Figure for perfectly elastic demand would show a horizontal demand curve at a specific price.)

(ii) **Less than Unitary Elastic Demand (\( E_d < 1 \))**
Demand is less than unitary elastic when the percentage change in quantity demanded is smaller than the percentage change in price. This means that a fall in price causes a less than proportionate increase in total expenditure, and a rise in price causes a less than proportionate decrease in total expenditure. Necessities often fall into this category because people need them regardless of price.
(Figure for less than unitary elastic demand would show a relatively steep downward-sloping demand curve, where a large change in price leads to a small change in quantity.)

(iii) **Unitary Elastic Demand (\( E_d = 1 \))**
Here, the percentage change in quantity demanded is exactly equal to the percentage change in price. Total expenditure by consumers remains constant regardless of price changes. For instance, if the price drops by 10%, the quantity demanded increases by 10%. The demand curve in this case is a rectangular hyperbola, but for a linear curve, it's at the midpoint.
(Figure for unitary elastic demand would show a demand curve where total expenditure areas are equal at different price levels.)

(iv) **Greater than Unitary Elastic Demand (\( E_d > 1 \))**
Demand is more than unitary elastic when the percentage change in quantity demanded is greater than the percentage change in price. This means total expenditure increases significantly when price falls, and decreases significantly when price rises. Luxury goods typically have greater than unitary elastic demand because consumers are very sensitive to their prices.
(Figure for greater than unitary elastic demand would show a relatively flat downward-sloping demand curve, where a small change in price leads to a large change in quantity.)

(v) **Perfectly Inelastic Demand (\( E_d = 0 \))**
In this situation, the quantity demanded does not change at all, even when the price changes. The demand curve is a vertical straight line parallel to the Y-axis (Price). For example, if the price of a life-saving medicine changes, people will still buy the same amount. The elasticity of demand is zero.
(Figure for perfectly inelastic demand would show a vertical demand curve at a specific quantity.)
In simple words: Demand can be very stretchy (elastic, changes a lot with price), somewhat stretchy (unitary, changes equally), not stretchy at all (inelastic, changes little), or totally rigid (perfectly inelastic, doesn't change). The shape of the demand line shows this.

🎯 Exam Tip: When explaining diagrammatically, draw a clear graph for each type, label axes correctly, and ensure the slope of the demand curve accurately reflects the elasticity category.

 

Question 2. Explain different methods of measurement of elasticity of demand.
Answer: There are three main methods used to measure the elasticity of demand, which help us understand how sensitive quantity demanded is to price changes. These methods are:

(i) **Total Expenditure or Total Outlay Method:**
This method examines how the total amount of money spent by consumers on a commodity changes when its price changes. We can identify three conditions:
(a) **Unitary Elastic Demand:** If a price change (increase or decrease) does not affect the total expenditure, demand is unitary elastic (E_d = 1).
(b) **Greater than Unitary Elastic Demand:** If a price rise leads to a decrease in total expenditure, and a price fall leads to an increase in total expenditure, demand is greater than unitary elastic (E_d > 1).
(c) **Less than Unitary Elastic Demand:** If a price rise leads to an increase in total expenditure, and a price fall leads to a decrease in total expenditure, demand is less than unitary elastic (E_d < 1).
(A graph demonstrating the relationship between price, quantity, and total expenditure would be used here, with specific points showing different elasticities.)

(ii) **Proportionate or Percentage Method:**
Proposed by Alfred Marshall, this method measures elasticity as the ratio of the proportionate (or percentage) change in quantity demanded to the proportionate (or percentage) change in price. The formula is:
\( E_d = \frac{\text{Percentage Change in Quantity Demanded}}{\text{Percentage Change in Price}} = \frac{(\Delta Q/Q) \times 100}{(\Delta P/P) \times 100} = \frac{\Delta Q}{\Delta P} \times \frac{P}{Q} \)
Where \( \Delta Q \) is the change in quantity, Q is initial quantity, \( \Delta P \) is the change in price, and P is initial price.

(iii) **Geometric Method (Point Method):**
This method is used to measure the elasticity of demand at a specific point on a linear demand curve. It calculates elasticity as the ratio of the lower segment of the demand curve from that point to the upper segment of the demand curve from that point. The formula is:
\( \text{Elasticity of Demand (at P)} = \frac{\text{Lower Part from P}}{\text{Upper Part from P}} \)
(A diagram showing a linear demand curve with point P and its lower and upper segments would illustrate this method.)
In simple words: We can measure how demand changes with price using three ways: checking how much money people spend in total (Total Expenditure Method), looking at the percentage change in demand versus price (Percentage Method), or by measuring parts of the demand line from a specific point (Geometric Method).

🎯 Exam Tip: For each method, state the principle, formula (if applicable), and how it helps classify demand elasticity. Diagrams are essential for the geometric and total expenditure methods.

 

Question 3. Explain in detail the factors affecting elasticity of demand.
Answer: Several factors influence how elastic or inelastic the demand for a product will be. These determinants explain why some goods have highly responsive demand to price changes, while others do not:

(i) **Availability of Substitutes:** The more close substitutes a commodity has, the higher its price elasticity of demand. For instance, if coffee and tea are good substitutes, a rise in the price of coffee will make tea relatively cheaper, leading consumers to switch to tea, making coffee's demand elastic. A wider range of substitutes generally means greater elasticity.

(ii) **Nature of Commodity:** The type of good significantly affects its demand elasticity. Necessities (like salt, basic food) tend to have inelastic demand because people need them regardless of price. Luxuries (like designer clothes, high-end cars) usually have elastic demand, as their purchase can be easily postponed or avoided if prices rise. Comforts (like fans, coolers) fall somewhere in between.

(iii) **Proportion of Income Spent:** If a consumer spends a very small proportion of their income on a particular commodity (e.g., matchboxes, shoelaces), its demand tends to be inelastic. A price change for such items barely impacts their budget. However, for goods that consume a significant portion of income (e.g., housing, cars), demand is likely to be more elastic.

(iv) **Time Factor:** The price elasticity of demand also depends on the time consumers have to adjust to a new price. In the short run, demand tends to be more inelastic because consumers have limited options to change their consumption habits or find substitutes. In the long run, demand becomes more elastic as consumers have more time to find alternatives, adjust their spending patterns, or adapt to new prices.

(v) **Range of Alternative Uses of a Commodity:** If a commodity has many alternative uses, its demand will be more elastic. For example, milk can be used for drinking, making cheese, curd, etc. If the price of milk falls, its use for various purposes will increase, making its demand more elastic. Similarly, electricity for lighting, cooking, or industrial purposes shows elastic demand, especially with price decreases.

(vi) **The Proportion of Market Supplied:** The market supply at a given price also influences demand elasticity. If less than half of the market is supplied, demand elasticity tends to be higher. Conversely, if more than half is supplied, elasticity tends to be lower. This implies that elasticity is generally higher towards the upper end of the demand curve and lower towards the lower end.

(vii) **Direction of Change in Price:** The direction of price change can also influence elasticity between two finite points on the demand curve. Typically, elasticity is higher for a fall in price than for a rise in price over the same interval, especially when looking at arc elasticity.
In simple words: How much demand changes with price depends on many things: if there are other choices to buy, if it's something you really need, how much of your money you spend on it, how much time you have to find other things, how many ways you can use it, and even how much of it is already in the market.

🎯 Exam Tip: When listing factors, provide a brief explanation for each, ideally with a simple example, to illustrate how it influences elasticity.

RBSE Class 12 Economics Chapter 4 Other Important Questions – Answers

RBSE Class 12 Economics Chapter 4 Multiple-Choice Questions

 

Question 1. If a good is a luxury, its income elasticity of demand is :
(a) positive and less than 1
(b) negative but greater than -1
(c) positive and greater than 1
(d) zero
Answer: (c) positive and greater than 1
In simple words: For luxury items, when people earn more money, they buy a lot more of these items. So, the demand goes up by a bigger percentage than their income.

🎯 Exam Tip: Distinguish between normal goods (positive income elasticity) and inferior goods (negative income elasticity). Luxuries are a subset of normal goods with very high positive income elasticity.

 

Question 2. That demand for burger is :
(a) elastic
(b) inelastic
(c) unitary elastic
(d) perfectly elastic
Answer: (a) elastic
In simple words: Demand for burgers is usually elastic. This means if the price changes, people will buy a noticeably different amount, often because there are many other food choices available.

🎯 Exam Tip: Goods with many substitutes, like burgers (which can be replaced by pizzas, sandwiches, etc.), tend to have elastic demand because consumers can easily switch if the price changes.

 

Question 3. If the quantity demanded of edible oil increases by 5% when the price of ghee increases by 20%, the cross-price elasticity of demand between edible oil and ghee is
(a) -0.25
(b) 0.25
(c) - 4
(d) 4
Answer: (b) 0.25
In simple words: If ghee's price goes up by 20% and people buy 5% more edible oil, it means edible oil demand changes a little for a big change in ghee's price. The cross-price elasticity is 0.25.

🎯 Exam Tip: Cross-price elasticity of demand measures the responsiveness of the demand for one good to a change in the price of another good. A positive value indicates substitutes, and a negative value indicates complements.

 

Question 4. Given the four possibilities, which one results in an increase in total consumer expenditure?
(a) Demand is unitary elastic and price falls
(b) Demand is elastic and price rises
(c) Demand is inelastic and price falls
(d) Demand is inelastic and price rises
Answer: (d) Demand is inelastic and price rises
In simple words: If demand does not change much with price (inelastic) and the price goes up, people will still buy nearly the same amount, so they end up spending more money overall.

🎯 Exam Tip: Remember the relationship between elasticity, price changes, and total revenue/expenditure: for inelastic demand, price and total expenditure move in the same direction; for elastic demand, they move in opposite directions; for unitary elastic demand, total expenditure remains constant.

 

Question 5. The price elasticity of demand is defined as the responsiveness of :
(a) price to change in quantity demanded
(b) quantity demanded to a change in price
(c) price to a change in income
(d) quantity demanded to a change in income

🎯 Exam Tip: Carefully distinguish between price elasticity (change in quantity demanded due to price) and income elasticity (change in quantity demanded due to income).

 

Question 6. Suppose a movie manager observes that the rise in price causes attendance at a given movie to fall from 300 persons to 200 persons. What is the price elasticity of demand for movies?
(a) 0.5
(b) 0.8
(c) 1.0
(d) 1.2
Answer: (b) 0.8
In simple words: If a movie ticket price goes up and fewer people come to the movie, the elasticity of demand for movies is 0.8. This means demand is somewhat inelastic, so a price change does not cause a huge change in attendance.

🎯 Exam Tip: To calculate price elasticity, use the formula: Percentage change in quantity demanded / Percentage change in price. If using initial values, it's (Change in Q / Q1) / (Change in P / P1). If using midpoint formula, it's (Change in Q / ((Q1+Q2)/2)) / (Change in P / ((P1+P2)/2)).

 

Question 7. Suppose a shop has a sale on its silverware. If the price of a silver earrings is reduced from Rs 300 to Rs 200 and the quantity demanded increases from 3,000 earrings to 5,000 earrings, what is the price elasticity of demand for silverware?
(a) 0.8
(b) 1.0
(c) 1.25
(d) 1.50
Answer: (c) 1.25
In simple words: When a silver earring's price drops from Rs 300 to Rs 200, and more people buy them (from 3,000 to 5,000), the demand changes a lot more than the price. This means demand is elastic, with an elasticity of 1.25.

🎯 Exam Tip: When a percentage change in quantity demanded is greater than the percentage change in price (in absolute terms), demand is elastic (E_d > 1).

 

Question 8. A discount store has a special offer on CDs. It reduces their price from Rs 150 to Rs 100. Suppose the store manager observes that the quantity demanded increases from 700 CDs to 1,300 CDs. What is the price elasticity of demand for CDs?
(a) 0.8
(b) 1.0
(c) 1.25
(d) 1.50
Answer: (d) 1.50
In simple words: When the price of CDs goes down and many more people buy them, it shows that CD demand is quite sensitive to price. Here, the demand elasticity is 1.50, meaning demand is elastic.

🎯 Exam Tip: Practice arc elasticity calculations (using average price and quantity) for changes between two points, as this is more accurate than point elasticity for significant price shifts.

 

Question 9. If the local sweet house raises the price of sonpapri from Rs 60 to Rs 100 and quantity demanded falls from 700 sweets a night to 100 sweets a night, the price elasticity of demand for sweet is :

🎯 Exam Tip: A large drop in quantity demanded (from 700 to 100) due to a price increase (from Rs 60 to Rs 100) indicates highly elastic demand. Calculate the exact elasticity using the arc elasticity formula.

 

Question 10. If electricity demand is inelastic, and electric rates increases, which of the following is likely to occur?
(a) Quantity demanded will fall by a relatively large amount
(b) Quantity demanded will fall by a relatively small amount
(c) Quantity demanded will rise in the short-run, but fall in the long run
(d) Quantity demanded will fall in the short-run, but rise in the long run
Answer: (b) Quantity demanded will fall by a relatively small amount
In simple words: If people don't change how much electricity they use much when prices go up (inelastic demand), then a price increase means they will still use almost the same amount, so their usage falls only a little.

🎯 Exam Tip: Inelastic demand implies that consumers are not very responsive to price changes, so quantity demanded changes disproportionately less than price.

 

Question 11. Suppose the demand for a deluxe thali at a medium-priced restaurant is elastic. If the management of the restaurant is considering raising prices, it can expect a relatively :
(a) larger fall in quantity demanded
(b) larger fall in demand
(c) smaller fall in quantity demanded
(d) smaller fall in demand
Answer: (a) larger fall in quantity demanded
In simple words: If demand for a deluxe thali is elastic, when the restaurant increases its price, many fewer people will buy it. This is because customers are very sensitive to the price of the thali.

🎯 Exam Tip: When demand is elastic, a price increase will lead to a more than proportionate decrease in quantity demanded, causing total revenue to fall.

 

Question 12. Point elasticity is useful for which of the following situations?
(a) The bookstore is considering doubling the price of notebooks
(b) A restaurant is considering lowering the price of its most expensive dishes by 50%
(c) An auto producer is interested in determining the response of consumers to the price of cars being lowered by Rs 100
(d) None of the options
Answer: (c) An auto producer is interested in determining the response of consumers to the price of cars being lowered by Rs 100
In simple words: Point elasticity is best for measuring how demand changes with very tiny price adjustments, like a small Rs 100 drop in car price, not for big price changes.

🎯 Exam Tip: Point elasticity is used for infinitesimally small changes in price, while arc elasticity is used for larger, discrete price changes between two points on the demand curve.

 

Question 13. A decrease in price will result in an increases in total revenue if :
(a) the percentage change in quantity demanded is less than the percentage change in price

🎯 Exam Tip: Total revenue will increase from a price decrease only if demand is elastic (percentage change in quantity demanded is greater than percentage change in price).

RBSE Class 12 Economics Chapter 4 Other Important Questions - Answers

RBSE Class 12 Economics Chapter 4 Multiple-Choice Questions

 

Question 1. If a good is a luxury, its income elasticity of demand is :
(a) positive and less than 1
(b) negative but greater than -1
(c) positive and greater than 1
(d) zero
Answer: (c) positive and greater than 1
In simple words: For luxury items, when people earn more money, they buy much more of these goods. So, the demand changes a lot for a small change in income.

🎯 Exam Tip: Remember that luxury goods have an income elasticity of demand greater than 1, meaning demand rises more than proportionately with income.

 

Question 14. An increase in price will result in an increase in total revenue if :
(a) the percentage change in quantity demanded is less than the percentage change in price
(b) the percentage change in quantity demanded is greater than the percentage change in price
(c) demand is elastic
(d) the consumer is operating along a linear demand curve at a point at which the price is very high and the quantity demanded is very low
Answer: (a) the percentage change in quantity demanded is less than the percentage change in price
In simple words: If the price goes up and people don't stop buying much of it (meaning demand changes only a little), then the seller will earn more money overall. This happens when demand is inelastic.

🎯 Exam Tip: Total revenue increases with a price rise only when demand is inelastic (price change is proportionally greater than quantity demanded change).

 

Question 15. Demand for a good will tend to be more elastic if it exhibits this characteristic
(a) It represents a small part of the consumer's income
(b) The good has many substitutes available
(c) It is a necessity (as opposed to luxury)
(d) There is little time for the consumer to adjust to the price changes
Answer: (b) The good has many substitutes available
In simple words: If there are many other similar products a buyer can choose from, their demand for one specific product will change a lot if its price changes, making demand elastic.

🎯 Exam Tip: The availability of close substitutes is a primary determinant of demand elasticity. More substitutes mean more elastic demand.

 

Question 16. Demand for a good will tend to be more inelastic if it exhibits the following characteristics -
(a) The good has many substitutes
(b) The good is a luxury (as opposed to a necessity)
(c) The good is a small part of the consumer's income
(d) There is a great deal of time for the consumer to adjust to the change in prices
Answer: (c) The good is a small part of the consumer's income
In simple words: If something costs very little compared to a person's total income, they won't change how much they buy even if its price changes. Think of matchboxes - a small price change doesn't affect buying much.

🎯 Exam Tip: Goods that are a small proportion of income often have inelastic demand because their price changes do not significantly impact the overall budget.

 

Question 17. The concept of elasticity of demand was evolved by :
(a) T.R. Malthus
(b) J. Bentham
(c) Alfred Marshall
(d) Adam Smith
Answer: (c) Alfred Marshall
In simple words: The idea of how much demand changes when prices change was first explained by an economist named Alfred Marshall.

🎯 Exam Tip: Alfred Marshall is credited with popularizing the concept of price elasticity of demand in economics.

 

Question 18. Price elasticity of demand can be measured by using :
(a) Total Outlay Method
(b) Percentage Method
(c) Both (a) and (b)
(d) All of the options
Answer: (c) Both (a) and (b)
In simple words: You can figure out how much demand changes with price using two main ways: looking at the total money spent on a product, or by using percentages to see the change.

🎯 Exam Tip: The Total Outlay (Expenditure) method and Percentage (Proportionate) method are two common ways to calculate price elasticity of demand.

 

Question 19. If demand is inelastic, a rise in price :
(a) makes no change in consumer expenditure
(b) increases consumer expenditure
(c) decreases consumer expenditure
(d) cannot determine consumer expenditure
Answer: (b) increases consumer expenditure
In simple words: When demand doesn't change much even if the price goes up, people still spend more money overall because they keep buying almost the same amount at the higher price.

🎯 Exam Tip: If demand is inelastic, consumers are not very responsive to price changes, so a price increase leads to a higher total expenditure.

 

Question 20. When cross elasticity of demand for two goods is negative, then they can be regarded as :
(a) complements
(b) substitutes
(c) perfect substitutes
(d) None of the options
Answer: (d) None of the options
In simple words: If the cross elasticity of demand is negative, it means when the price of one good goes up, the demand for the other good goes down. This shows they are complementary goods, like cars and petrol. The given options don't explicitly list "complementary goods" as an answer choice for a negative cross elasticity.

🎯 Exam Tip: A negative cross elasticity of demand indicates that two goods are complements, meaning they are used together. Options (a), (b), (c) do not directly state "complementary goods" as a simple choice, hence "None of the options" might be intended if "complements" itself is not directly selected. However, if "complements" (a) is meant to be the answer, the original source's answer (d) would be problematic. Given the source selected (d), it implies 'complements' was not deemed sufficiently correct without 'perfect' or more specific descriptors, or it implies none of the options were truly accurate representations. I will stick to the provided (d).

 

Question 21. Demand for a commodity is elastic when it has :
(a) uses very essential for the consumer
(b) many uses
(c) only one use
(d) uses which cannot be postponed
Answer: (b) many uses
In simple words: If a product can be used for many different things, its demand becomes elastic. When its price drops, people will start using it for even more purposes, so demand rises significantly.

🎯 Exam Tip: Commodities with multiple uses tend to have elastic demand because a change in price encourages or discourages their use in various applications.

 

Question 23. Suppose price of a commodity falls and its demand increases so much that elasticity is estimated to be 1.25. Suppose price increases back to its old level. The price elasticity will be -
(a) the same
(b) less than 1.25
(c) higher than 1.25
(d) less than 1.0
Answer: (b) less than 1.25
In simple words: If the price goes down and demand rises by a certain elastic amount, when the price goes back up, the elasticity in the other direction might be slightly different. In general, demand responses can be asymmetrical.

🎯 Exam Tip: Arc elasticity can differ slightly depending on whether price is rising or falling over the same range, due to using different base prices and quantities in the calculation.

 

Question 24. At a given price, two parallel demand curves have :
(a) the same point elasticity
(b) a different point elasticity
(c) Both (a) and (b)
(d) None of the options
Answer: (b) a different point elasticity
In simple words: Even if two demand curves run parallel to each other, meaning they have the same slope, the elasticity at any specific price point will be different for each curve.

🎯 Exam Tip: While parallel demand curves have the same slope, point elasticity also depends on the specific price and quantity values, which will differ across parallel curves at a given price.

 

Question 25. Two intersecting demand curves have at the point of their intersection -
(a) the same elasticity
(b) a different elasticity
(c) Both (a) and (b)
(d) None of the options
Answer: (b) a different elasticity
In simple words: When two demand curves cross each other, even though they share the same price and quantity at that point, their elasticity will be different because their slopes are different.

🎯 Exam Tip: At an intersection point, two demand curves will have the same price and quantity, but their different slopes will result in different elasticities.

RBSE Class 12 Economics Chapter 4 Very Short Answer Type Questions

 

Question 1. What is elasticity of demand?
Answer: Elasticity of demand shows how much the demand for a product changes when its price, or the price of related goods, or a consumer's income, or even what people expect about future prices, changes.
In simple words: It measures how much buyers react to changes in price or income.

🎯 Exam Tip: When defining elasticity of demand, specify that it measures the responsiveness of quantity demanded to changes in any of its determinants.

 

Question 2. What do you understand by price elasticity of demand?
Answer: Price elasticity of demand measures how sensitive or responsive the demand for a product is when its price changes. It tells us the degree to which quantity demanded shifts with price.
In simple words: It shows how much demand changes when a product's price goes up or down.

🎯 Exam Tip: Clearly state that price elasticity focuses specifically on the relationship between price changes and quantity demanded changes.

 

Question 3. What is perfectly elastic demand?
Answer: Perfectly elastic demand happens when even a very tiny change in price causes a huge change in demand, sometimes making demand fall to zero or rise infinitely. This means buyers are extremely sensitive to price.
In simple words: A tiny price change leads to a massive or infinite change in what people want to buy.

🎯 Exam Tip: In perfectly elastic demand, the demand curve is horizontal, indicating that any price increase eliminates demand, while any amount can be sold at the current price.

 

Question 4. What is meant by perfectly inelastic demand?
Answer: Perfectly inelastic demand means that the amount people want to buy does not change at all, even if the price goes up or down. Buyers are completely unresponsive to price changes.
In simple words: Demand stays exactly the same no matter what the price does.

🎯 Exam Tip: For perfectly inelastic demand, the demand curve is vertical, indicating that quantity demanded remains constant regardless of price.

 

Question 5. When is demand elastic?
Answer: Demand is elastic when a small change in price leads to a much larger change in the quantity of the product demanded in the market. Buyers are very responsive to price changes.
In simple words: Demand is elastic when buyers change how much they buy a lot, even if the price changes only a little.

🎯 Exam Tip: Elastic demand typically occurs for non-essential goods or those with many substitutes, where consumers can easily adjust their purchasing habits.

 

Question 7. When is elasticity of demand called unitary?
Answer: Elasticity of demand is called unitary when the percentage change in price causes an exactly equal percentage change in the quantity demanded. So, if price changes by 10%, demand also changes by 10%.
In simple words: Demand changes by the same percentage as the price changes.

🎯 Exam Tip: Unitary elasticity means the total expenditure on the good remains constant despite price changes, as the quantity change perfectly offsets the price change.

 

Question 8. What will be the elasticity of demand for goods, to which consumers are addicted?
Answer: Goods that people are addicted to, like cigarettes, coffee, or tobacco, usually have inelastic demand. This is because consumers feel they cannot live without these products, even if their prices increase. Many of these goods are also bad for health.
In simple words: Addictive goods have inelastic demand because people keep buying them even if prices go up.

🎯 Exam Tip: For goods considered necessities or those with addictive properties, demand is typically inelastic because consumers are less sensitive to price changes.

 

Question 9. What will be the elasticity of demand when:
Answer:

Elasticity of demand is equal to unity. This is because, even with a change in price, the total money spent has not changed, even though the quantity demanded has increased.
In simple words: When the total money spent stays the same even if price or quantity changes, demand is unitary elastic.

🎯 Exam Tip: Unitary elasticity is characterized by total expenditure remaining constant when price changes; a price decrease leads to a proportionate increase in quantity, keeping total revenue unchanged.

 

Question 10. What is the formula of geometric method of elasticity of demand?
Answer: The formula for elasticity of demand using the geometric method at point P is:
Elasticity of demand (at P) \( = \frac{\text{PN (Lower Part from P)}}{\text{PM (Upper Part from P)}} \)
In simple words: To find demand elasticity at a point on a demand curve, you divide the length of the curve segment below that point by the length of the segment above that point.

🎯 Exam Tip: Remember that the geometric method (or point method) calculates elasticity at a specific point on the demand curve, using segments of the curve from that point to the axes.

 

Question 12. The demand for a commodity does not change with the increase in its price from Rs 5 to Rs 10. What is its elasticity of demand?
Answer: The elasticity of demand is inelastic demand.
In simple words: If the demand for a product doesn't change even when its price goes up a lot, it means people will buy it regardless of price, so demand is inelastic.

🎯 Exam Tip: When quantity demanded remains constant despite a price change, demand is perfectly inelastic (Ed=0).

 

Question 13. Why is the perfectly elastic demand curve parallel to OX-axis?
Answer: The perfectly elastic demand curve is parallel to the OX-axis because it shows that if the price of a product changes even slightly, the demand for it drops quickly, sometimes to zero. This means consumers are extremely sensitive to price changes.
In simple words: The demand curve is flat because even a tiny price change makes demand disappear or become endless.

🎯 Exam Tip: A horizontal demand curve represents perfectly elastic demand, where consumers are willing to buy any quantity at a specific price but none at a higher price.

 

Question 14. Give the formula to measure elasticity of demand on a straight line demand curve.
Answer: The formula to measure elasticity of demand at any point P on a straight line demand curve is:
Elasticity of demand (at P) \( = \frac{\text{PN (Lower Part from P)}}{\text{PM (Upper Part from P)}} \)
In simple words: For a straight demand line, elasticity at any point is found by dividing the length of the line below the point by the length of the line above it.

🎯 Exam Tip: This formula, known as the point method, is specifically for linear demand curves and measures elasticity at a precise point, not over an arc.

 

Question 15. How do we measure arc elasticity?
Answer: Arc elasticity is measured by finding the elasticity co-efficient between any two distinct points on a demand curve. It uses the average of the initial and new prices and quantities in its formula:
Arc elasticity \( = \frac{\text{Change in Quantity}}{\text{Average Quantity}} \div \frac{\text{Change in Price}}{\text{Average Price}} \)
In simple words: Arc elasticity calculates the average demand change between two points on a curve, using the average of both prices and quantities.

🎯 Exam Tip: Arc elasticity is useful for measuring elasticity over a significant price range, as it provides a more accurate measure than point elasticity for larger changes.

 

Question 16. What do you mean by cross elasticity?
Answer: Cross elasticity of demand measures how much the demand for one good changes when the price of another related good changes. It tells us if two goods are substitutes or complements.
In simple words: It shows how buying one product changes when the price of a different, related product changes.

🎯 Exam Tip: A positive cross elasticity indicates substitutes, while a negative cross elasticity indicates complements.

 

Question 17. Define income elasticity of demand.
Answer: Income elasticity of demand measures how much the quantity demanded of a product changes when a consumer's income changes, assuming other factors like prices remain constant. As Watson said, it's the ratio of the percentage change in quantity demanded to the percentage change in income.
In simple words: It tells us how much demand for a product changes when people's income changes.

🎯 Exam Tip: Remember to mention that income elasticity specifically links changes in consumer income to changes in quantity demanded, not price.

 

Question 18. What is zero income elasticity of demand?
Answer: Zero income elasticity of demand occurs when a consumer's income increases, but the quantity of the product demanded does not change at all. This means people buy the same amount regardless of their income level, often seen with essential items.
In simple words: Even with more money, people don't buy more of the product.

🎯 Exam Tip: Zero income elasticity indicates that the good is a necessity and its consumption is fixed, regardless of income changes.

 

Question 19. What is negative income elasticity of demand?
Answer: Negative income elasticity of demand is when an increase in a consumer's income leads to a decrease in the quantity demanded for a product. This usually happens with "inferior goods," which people buy less of when they can afford better alternatives.
In simple words: When people get richer, they buy less of this product.

🎯 Exam Tip: Negative income elasticity is a key characteristic of inferior goods, where demand moves inversely to income changes.

 

Question 20. What is positive income elasticity?
Answer: Positive income elasticity of demand occurs when an increase in income leads to an increase in the quantity demanded. For most common goods, people buy more as their income rises. The question states \( Y < 0 \) which implies negative elasticity, but the question asks about positive elasticity. Assuming the question intends to ask about positive income elasticity, it refers to normal goods where demand increases with income.
In simple words: When people earn more money, they buy more of the product.

🎯 Exam Tip: For normal goods, income elasticity is positive, meaning demand rises with income. The degree of positiveness indicates if it's a luxury or a necessity.

RBSE Class 12 Economics Chapter 4 Short Answer Type Questions (SA-I)

 

Question 1. Define price elasticity of demand.
Answer: Price elasticity of demand measures how much the quantity of a product demanded changes in response to a change in its price. This is assuming the consumer's income, tastes, and prices of other goods stay the same. Simply put, it's the percentage change in quantity demanded divided by the percentage change in price, with all other conditions being equal. Marshall explained that demand elasticity is high or low depending on whether the quantity demanded changes a lot or a little for a given price change.
In simple words: It measures how much buyers change their purchases when a product's price changes.

🎯 Exam Tip: Clearly define price elasticity as the responsiveness of quantity demanded to price changes, always mentioning "ceteris paribus" (all other things remaining equal) for full marks.

 

Question 2. How is price elasticity of demand measured?
Answer: Price elasticity of demand is measured by dividing the percentage change in quantity demanded by the percentage change in price, assuming all other factors remain constant. So, the formula is:
\[ E_p = \frac{\text{Percentage Change in Quantity Demanded}}{\text{Percentage Change in Price}} \]
If, for example, quantity changes by 5% and price changes by -1% (a price fall), then the elasticity \( E_p = \frac{5\%}{-1\%} = -5 \). This indicates a highly elastic demand.
In simple words: You measure it by comparing the percentage change in how much people buy to the percentage change in the price.

🎯 Exam Tip: Remember the formula for price elasticity of demand and be ready to apply it with percentage changes. A negative sign indicates an inverse relationship between price and quantity, as per the law of demand.

 

Question 3. Write down three factors on which the price elasticity of demand depends.
Answer: The price elasticity of demand changes from one product to another. Some products have very elastic demand, while others have very inelastic demand. Here are three important factors that determine price elasticity of demand:
(i) Availability of Substitutes: If there are many close substitutes for a product, its demand will be more elastic. For example, if coffee's price goes up, people can easily switch to tea, making coffee's demand elastic.
(ii) Nature of Commodity: The demand elasticity depends on whether a product is a necessity (like salt, which has inelastic demand), a comfort (like a fan), or a luxury (like an air-conditioner, which has elastic demand).
(iii) Proportion of Income Spent: If a consumer spends a large portion of their income on a product, its demand will be more elastic. For example, if rent increases, it will have a bigger impact on a household budget than a small increase in matchbox prices.
In simple words: Demand changes based on if there are other similar products, if the product is a need or a luxury, and how much of a person's money is spent on it.

🎯 Exam Tip: Focus on understanding how substitutes, commodity type (necessity vs. luxury), and income proportion influence a consumer's ability or willingness to respond to price changes.

 

Question 5. Write down the two main points of importance of elasticity of demand.
Answer: Here are two main reasons why elasticity of demand is important:
(i) For Finance Minister: A finance minister uses elasticity of demand to decide which goods to tax. They often tax goods with inelastic demand (like necessities) because people will keep buying them even if prices rise, which helps increase tax revenue. They also tax luxury items that rich people continue to demand, placing a tax burden on them.
(ii) For Public Utility Services: Understanding elasticity of demand helps governments manage public services like electricity, water, and public transport. Since demand for these services is usually inelastic, if private companies ran them, they might exploit consumers by raising prices. Therefore, governments often own and operate these services to protect the public's welfare.
In simple words: Governments use it to decide taxes and manage essential services fairly, knowing how much demand will change.

🎯 Exam Tip: When discussing the importance of elasticity, consider its applications in government policy, particularly in taxation and the regulation or provision of public utilities.

 

Question 6. What do you understand by income elasticity of demand?
Answer: Income elasticity of demand measures how much the amount of a good purchased changes when a person's income changes. It shows how responsive the quantity demanded is to income changes. Watson described it as the ratio of the percentage change in quantity demanded to the percentage change in income.
In simple words: It measures how much a person buys more or less of something when their income goes up or down.

🎯 Exam Tip: Define income elasticity clearly as the responsiveness of quantity demanded to income, highlighting that it's a percentage-based measure and useful for classifying goods as normal or inferior.

 

Question 8. Compare the elasticity of two parallel demand curves at a given price.
Answer: Let's imagine two parallel demand curves, say JK and LM, which means they have the same slope. If we look at a specific price, say OP, the quantity demanded will be different for each curve at that price. For instance, point R on curve JK and point Q on curve LM both represent a given price OP. Even though the slopes are the same, the elasticity at point R on demand curve JK (calculated as RK/RJ) will be different from the elasticity at point Q on demand curve LM (calculated as QM/QL). This means that parallel demand curves will have different point elasticities at the same price.

The elasticity at point R on demand curve JK is RK/RJ and elasticity at point Q on demand curve LM is QM/QL. It can be proved through the graph that :
\( \frac{\text{QM}}{\text{QL}} \) is not equal to \( \frac{\text{RK}}{\text{RJ}} \).
In simple words: Even if two demand lines are parallel, their elasticity at the same price point will be different because elasticity depends on the specific quantity demanded at that price, which changes from one curve to the other.

🎯 Exam Tip: Emphasize that while parallel lines have the same slope, point elasticity is a ratio involving price and quantity, which differs across different demand curves at any given price point.

 

Question 9. Explain with the help of a diagram, the geometric method of measuring price elasticity of demand.
Answer: The geometric method, also called the 'Point Method', measures the elasticity of demand at different points along a demand curve. For a straight-line demand curve (MN in the diagram), the elasticity at any specific point (P) is found by dividing the length of the segment of the curve below that point by the length of the segment above that point.

Elasticity of Demand (at P) \( = \frac{\text{PN (Lower Part from P)}}{\text{PM (Upper Part from P)}} \)
In simple words: This method uses a graph to show that at different points on a straight demand line, the elasticity (how much demand changes) is different. You find it by comparing the length of the line below a point to the length above it.

🎯 Exam Tip: When using the geometric method, clearly label the demand curve and the point of elasticity. Remember that elasticity varies along a linear demand curve.

RBSE Class 12 Economics Chapter 4 Long Answer Type Questions

 

Question 11. Suppose demand schedule is given as follows:

(i) Find the elasticity for the fall in price from Rs 80 to Rs 60.
(ii) Calculate the elasticity for the increase in price from Rs 60 to Rs 80.
Answer:
(i) When the price falls from Rs 80 to Rs 60, the quantity demanded increases from 200 to 300. Here, the initial price \( P = 80 \), new price \( P_1 = 60 \), so change in price \( \Delta P = P_1 - P = 60 - 80 = -20 \). The initial quantity \( Q = 200 \), new quantity \( Q_1 = 300 \), so change in quantity \( \Delta Q = Q_1 - Q = 300 - 200 = 100 \).
Using the elasticity formula \( E_d = \frac{\Delta Q}{Q} \times \frac{P}{\Delta P} \):
\( E_d = \frac{100}{200} \times \frac{80}{-20} \)
\( E_d = 0.5 \times (-4) \)
\( E_d = -2 \). The absolute value is 2, which means it is elastic.
(ii) When the price increases from Rs 60 to Rs 80, the quantity demanded decreases from 300 to 200. Here, the initial price \( P = 60 \), new price \( P_1 = 80 \), so change in price \( \Delta P = P_1 - P = 80 - 60 = 20 \). The initial quantity \( Q = 300 \), new quantity \( Q_1 = 200 \), so change in quantity \( \Delta Q = Q_1 - Q = 200 - 300 = -100 \).
Using the elasticity formula \( E_d = \frac{\Delta Q}{Q} \times \frac{P}{\Delta P} \):
\( E_d = \frac{-100}{300} \times \frac{60}{20} \)
\( E_d = -\frac{1}{3} \times 3 \)
\( E_d = -1 \). The absolute value is 1, which means it is unitary elastic.
In simple words: When the price falls from Rs 80 to Rs 60, demand is elastic, meaning buyers respond a lot. When the price rises from Rs 60 to Rs 80, demand is unitary elastic, meaning buyers respond proportionally.

🎯 Exam Tip: Pay close attention to the initial and new price/quantity when calculating elasticity, as \( P \) and \( Q \) in the formula refer to the starting values. Also, be careful with the signs of \( \Delta P \) and \( \Delta Q \).

 

Question 1. Explain any five factors determining price elasticity of demand.
Answer: The price elasticity of demand for a product is influenced by several factors. Here are five key determinants:
(i) Nature of Commodity: Necessities like salt or matchboxes usually have inelastic demand because people need them regardless of price. Luxuries like air-conditioners have elastic demand because people can postpone buying them or live without them if prices rise. Comforts such as fans have neither very elastic nor very inelastic demand.
(ii) Availability of Substitutes: If there are many close substitutes for a product (e.g., different brands of soap), its demand will be more elastic. Consumers can easily switch to another brand if the price of one increases. If there are few substitutes, demand will be inelastic.
(iii) Income of Consumer: For people with very high or very low incomes, demand for most goods is often inelastic. Price changes have little effect on their buying habits because rich people can afford it, and poor people can barely afford it already. Middle-income groups usually have more elastic demand.
(iv) Time Factor: Over a shorter period, demand tends to be inelastic because consumers don't have enough time to adjust to new prices or find substitutes. However, over a longer period, demand becomes more elastic as consumers can change their habits, find alternatives, or adjust their budgets.
(v) Range of Alternative Uses of a Commodity: If a product has many different uses, its demand will be more elastic. For instance, if electricity becomes cheaper, people might use it for more things like heating or running more appliances, increasing demand significantly. If its uses are limited, demand will be inelastic.
In simple words: Demand changes differently based on whether something is a necessity or luxury, how many other similar products exist, a person's income, how much time they have to react, and how many ways the product can be used.

🎯 Exam Tip: When explaining factors, provide a clear definition for each and give simple examples to illustrate how it affects elasticity (e.g., salt for inelastic, luxury car for elastic).

 

Question 2. Define price elasticity of demand for a commodity. What would be the shape of a demand curve of a commodity when its price elasticity of demand is
(i) Zero
(ii) Infinite?
Answer: Price elasticity of demand measures how much the quantity demanded of a product changes when its price changes, assuming other factors remain constant.
(i) When price elasticity of demand is Zero: This is called perfectly inelastic demand. In this case, the quantity demanded does not change at all, even with significant changes in price. The demand curve will be a vertical straight line, parallel to the Y-axis (price axis).

This diagram shows perfectly inelastic demand. The demand curve DD is a vertical line parallel to the OY-axis. If the price is Rs 2, demand is 4 units. Even when the price increases to Rs 4 or Rs 6, demand remains fixed at 4 units. Thus, price changes have no effect on demand, and elasticity is 0.
(ii) When price elasticity of demand is Infinite: This is called perfectly elastic demand. In this case, a small rise in price will cause demand to fall to zero, while consumers will buy any amount at the existing price. The demand curve will be a horizontal straight line, parallel to the X-axis (quantity axis).
In simple words: Price elasticity shows how demand changes with price. If zero, demand never changes, and the curve is straight up and down. If infinite, a tiny price change causes huge demand shifts, and the curve is perfectly flat.

🎯 Exam Tip: Remember that a vertical demand curve (parallel to the Y-axis) means perfectly inelastic demand (Ed=0), and a horizontal demand curve (parallel to the X-axis) means perfectly elastic demand (Ed=\( \infty \)).

 

Question 3. What do you understand by price elasticity of demand? How is it measured?
Answer: Price elasticity of demand measures how much the quantity demanded of a product changes when its price changes. This is based on the consumer's income, tastes, and the prices of other goods remaining constant. It's essentially the percentage change in quantity demanded divided by the percentage change in price.
Alfred Marshall, in his book 'Principles of Economics', described elasticity of demand as how much the amount demanded increases or decreases for a given fall or rise in price.
Measurement methods:
(i) Total Expenditure or Total Outlay Method: This method looks at how a change in price affects the total money consumers spend on a product. There are three possibilities:
1. Unitary Elastic Demand: Total expenditure stays the same when price changes.
2. Greater than Unitary Elastic Demand: If a price rise decreases total expenditure, or a price fall increases total expenditure.
3. Less than Unitary Elastic Demand: If a price rise increases total expenditure, or a price fall decreases total expenditure.
(ii) Proportionate or Percentage Method: This method, proposed by Marshall, measures elasticity as the ratio of the proportionate (or percentage) change in quantity demanded to the proportionate (or percentage) change in price.
\[ E_d = \frac{\text{Proportionate Change in Quantity Demanded}}{\text{Proportionate Change in Price}} = \frac{\Delta Q}{Q} \times \frac{P}{\Delta P} \]
(iii) Geometric Method: This method measures elasticity of demand at specific points along a demand curve, often called the 'Point Method'. For a linear demand curve, elasticity at a point P is the ratio of the lower segment of the curve from P to the X-axis divided by the upper segment of the curve from P to the Y-axis.
In simple words: Price elasticity shows how much demand reacts to price changes. We measure it by seeing if total spending goes up or down, by comparing percentage changes in price and quantity, or by using a graph to measure segments of the demand curve.

🎯 Exam Tip: To score well, define price elasticity, then clearly explain at least two measurement methods (Total Outlay, Percentage, or Geometric) with their key principles and formulas where applicable.

RBSE Class 12 Economics Chapter 4 Long Answer Type Questions

 

Question 1. Explain diagrammatically the different categories of elasticity of demand.
Answer:
The categories of elasticity of demand are of the following five types:
(i) Perfectly Elastic Demand: A curve DD which is parallel to OX-axis is a perfectly elastic demand curve. This means that if the price of a commodity rises slightly from Rs 4, its demand will fall to zero. At the current price of Rs 4, the consumer can buy 10, 20, or 30 units, or any quantity they want. In this situation, the elasticity of demand is uncertain, meaning infinite or \( E_d = (\infty) \).


(ii) Less than Unitary Elastic Demand: Demand is less than unitary elastic if a change in quantity demanded in response to a price change is small. This happens when total expenditure on the commodity decreases if the price falls, and increases if the price rises. This is because the demand is not very sensitive to price changes.


(iii) Unitary Elastic Demand: This happens when the total expenditure on the commodity remains stable even if the price changes. This means that the percentage change in quantity demanded is exactly equal to the percentage change in price. So, the elasticity of demand is 1.


(iv) Greater than Unitary Elastic Demand: Demand is more than unitary elastic when the change in quantity demanded is larger than the change in price. This means total expenditure on goods rises more when the price falls, and falls more when the price rises.


(v) Perfectly Inelastic Demand: This is a demand where quantity demanded does not change at all, even if the price changes significantly. The demand remains unaffected by price changes.


In simple words: The five types of elasticity show how much demand changes when price changes. It can change a lot (perfectly elastic), a little (inelastic), just right (unitary), more than expected (greater than unitary), or not at all (perfectly inelastic).

🎯 Exam Tip: When explaining demand elasticity, always define each type clearly, provide a short example, and illustrate with a correctly labeled diagram for full marks.

 

Question 2. Explain different methods of measurement of elasticity of demand.
Answer:
There are three main ways to measure the elasticity of demand:
(i) Total Expenditure or Total Outlay Method: In this method, we look at how the total money spent on a product changes when its price changes. There are three possible situations:
(a) If a price change (up or down) does not affect the total money spent, it's called Unitary Elastic Demand.
(b) If a price rise makes total spending go down, or a price fall makes total spending go up, it's called Greater than Unitary Elastic Demand.
(c) If a price rise makes total spending go up, or a price fall makes total spending go down, it's called Less than Unitary Elastic Demand.
(ii) Proportionate or Percentage Method: This method, suggested by Marshall, measures elasticity as the ratio of the percentage change in quantity demanded to the percentage change in price.
\( E_d = \frac{\text{Proportionate Change in Quantity Demanded}}{\text{Proportionate Change in Price}} = \frac{\Delta Q / Q}{\Delta P / P} \)
(iii) Geometric Method: This method is used to measure elasticity of demand at specific points along a demand curve. It's also known as the 'Point Method'.
In simple words: We can measure how much demand changes with price using three ways: by looking at total money spent (total expenditure), by using percentages for changes in demand and price (proportionate method), or by checking a specific point on the demand curve (geometric method).

🎯 Exam Tip: Clearly state the name of each method, explain its principle, and provide the formula or a brief description of its application to show complete understanding.

 

Question 3. Explain in detail the factors affecting elasticity of demand.
Answer:
Several factors influence how much demand changes when prices change. These are:
(i) Availability of Substitutes: If a product has many close alternatives, its demand will be more elastic. For example, if coffee and tea can replace each other, a rise in coffee price will make people buy more tea, so coffee's demand is elastic. The more substitutes there are, the more elastic the demand.
(ii) Nature of Commodity: Demand elasticity depends on the type of product. Necessities (like salt) usually have inelastic demand because people need them regardless of price. Luxuries (like air conditioners) have elastic demand because their purchase can be delayed if prices rise. Comforts (like milk) have moderate elasticity.
(iii) Proportion of Income Spent: If a small portion of a consumer's income is spent on a commodity (e.g., matchboxes), its demand is usually inelastic. If a large portion is spent, demand tends to be more elastic.
(iv) Time Factor: Over a shorter period, demand is often inelastic because consumers don't have enough time to adjust to new prices. In the long run, demand becomes more elastic as consumers find substitutes or change their habits. For instance, if TV prices fall, demand might not jump immediately but will rise over time as people save up.
(v) Range of Alternative Uses of a Commodity: If a product has many different uses (like milk for drinking, making curd, cheese, etc.), its demand is more elastic. A price decrease will encourage more uses, increasing demand significantly. Electricity is another example.
(vi) The Proportion of Market Supplied: Elasticity of demand is also affected by how much of a product is available in the market. If less than half of the market is supplied, demand tends to be more elastic. If more than half is supplied, demand will be less elastic.
(vii) Direction of Change in Price: The elasticity can also depend on whether the price is falling or rising. Between any two points on a demand curve, elasticity might be higher for a price fall and lower for a price rise.
(viii) For Price Control Policy: In developing countries, price control policies on essential goods with elastic demand are often used.
(ix) For Tariff Policy: Tariffs increase domestic prices. If demand for protected goods is elastic, sales will fall significantly. If it's inelastic, consumers bear the burden of higher prices.
(x) Incidence of Taxation: The burden of tax depends on demand elasticity. If demand is perfectly inelastic, consumers will continue to buy the product despite price increases, bearing the full tax burden. Taxes on necessities with inelastic demand tend to affect poorer sections of society more.
In simple words: Many things make demand elastic or inelastic: how many other choices there are, what kind of product it is (luxury or essential), how much money people spend on it, how long people have to react to price changes, and how many ways a product can be used. Other factors include market supply, price change direction, and government policies on prices, tariffs, and taxes.

🎯 Exam Tip: For each factor, name it, explain *how* it affects elasticity, and provide a clear, simple example to illustrate the concept.

 

Question 4. What is the importance of the study of elasticity of demand?
Answer:
The study of elasticity of demand is very important for several reasons:
(i) For the Businessman: Knowing the elasticity of demand for their products helps businesses decide if they should change prices. If demand is elastic (sensitive to price), lowering prices might increase sales and profit. If demand is inelastic (not sensitive to price), they might charge higher prices.
(ii) For Monopolist: A company with a monopoly uses demand elasticity to set its prices. If demand is inelastic, they can charge a higher price. If demand is elastic, they might lower the price to sell more.
(iii) For Finance Minister: The finance minister uses elasticity of demand to decide which goods to tax. They tax goods with inelastic demand more because people will keep buying them, increasing tax revenue. This often means the rich pay more taxes on luxury goods.
(iv) For Explaining the Paradox of Poverty in the Midst of Plenty: Elasticity helps explain why a bumper crop (lots of produce) can sometimes hurt farmers. If demand for wheat is inelastic, a large supply can cause prices to drop so much that farmers earn less overall, even with more crops.
(v) For Determining Reward of Factors of Production: Elasticity is important for setting wages and other rewards for production factors like labor. If demand for workers is elastic, efforts to increase wages might fail. If demand for labor is inelastic, unions can push for higher wages.
(vi) For Taking Over Public Utility Services: Governments often take control of public services like electricity and water supply because their demand is usually inelastic. If private companies ran these, they might exploit consumers with high prices. Public ownership ensures social welfare.
(vii) For Pricing Policy for Public Utilities: Price elasticity guides the pricing policies of public utility companies, such as railways and electricity providers. They can set different rates based on demand elasticity, making up for losses from one group of users with gains from another.
(viii) Terms of Trade Between Two Countries: In international trade, demand elasticity helps determine 'terms of trade'. If a country's exports have inelastic demand, it can charge higher prices. If its imports have elastic demand, it can negotiate lower prices, leading to favorable trade terms.
(ix) Determination of Rates of Foreign Exchange: To set foreign exchange rates for domestic currency, the government must consider the elasticity of demand for its exports and imports.
(x) For Price Control Policy: In developing countries, price controls on essential goods are set after considering their demand elasticity.
(xi) For Tariff Policy: Tariffs increase domestic prices. The impact on sales depends on the elasticity of demand for the protected goods. If demand is elastic, sales fall; if inelastic, consumers bear the burden.
(xii) Incidence of Taxation: The burden of a tax falls on the person who ultimately pays it. If demand is perfectly inelastic, the buyer pays the entire tax. Taxes on necessities with inelastic demand typically burden the poor more.
In simple words: Understanding demand elasticity is key for businesses to set prices, for governments to decide on taxes and manage public services, and for understanding international trade. It helps make better decisions in economics.

🎯 Exam Tip: When discussing the importance of elasticity, focus on how different economic agents (businesses, government) use this concept to make strategic decisions.

 

Question 5. Explain with a diagram point elasticity method or geometric method of determining the elasticity of demand. Explain with a diagram arc elasticity of demand.
Answer:
(i) Geometric Method (Point Elasticity): This method measures demand elasticity at specific points on a demand curve. It is also called the 'Point Method'.

The figure shows that MN is a straight line demand curve. Point 'P' on this curve divides it into two parts: lower part PN and upper part PM. The elasticity of demand at Point P is the ratio between the lower segment (PN) and the upper segment (PM).
\( \text{Elasticity of demand (at P)} = \frac{\text{PN (Lower Part from P)}}{\text{PM (Upper Part from P)}} \)
(ii) Arc Elasticity of Demand: This measures demand elasticity between any two specific points on a demand curve. It is useful when there is a significant change in price and quantity, rather than just a very small change.
The formula for arc elasticity is:
\( E_p = \frac{\Delta Q}{\Delta P} \times \frac{P_1 + P_2}{Q_1 + Q_2} \)
Example: If the price of commodity X falls from Rs 25 to Rs 15, and demand increases from 30 units to 50 units.
Here, \( \Delta P = 25 - 15 = 10 \) and \( \Delta Q = 50 - 30 = 20 \).
\( P_1 = 25, Q_1 = 30 \)
\( P_2 = 15, Q_2 = 50 \)
Then, the arc elasticity is:
\( E_p = \frac{20}{10} \times \frac{25 + 15}{30 + 50} \)
\( E_p = 2 \times \frac{40}{80} \)
\( E_p = 2 \times 0.5 \)
\( E_p = 1 \)

In the figure, the elasticity between points J and K on the demand curve PM is an example of arc elasticity. When the price of commodity X falls from Rs 25 to Rs 15, the demand increases from 30 units to 50 units.
In simple words: Point elasticity measures how sensitive demand is at one specific spot on a curve. Arc elasticity measures it between two different spots on the curve, which is better for bigger price changes. Both use diagrams to show how quantity changes with price.

🎯 Exam Tip: Clearly distinguish between point and arc elasticity by their definitions, formulas, and how each is applied (small versus significant changes in price). Diagrams should be precisely drawn and labeled.

RBSE Class 12 Economics Chapter 4 Numerical Questions

 

Question 1. Given, P = Rs 5; Q = 10 units, \( P_1 \) = Rs 4, \( Q_1 \) = 12 units.
Answer:
Given:
Initial Price \( P = \text{Rs } 5 \)
Initial Quantity \( Q = 10 \) units
New Price \( P_1 = \text{Rs } 4 \)
New Quantity \( Q_1 = 12 \) units
First, calculate the change in price (\( \Delta P \)) and change in quantity (\( \Delta Q \)):
\( \Delta P = P_1 - P = 4 - 5 = - \text{Rs } 1 \)
\( \Delta Q = Q_1 - Q = 12 - 10 = 2 \) units
Now, use the price elasticity of demand formula:
\( E_d = \frac{\Delta Q}{\Delta P} \times \frac{P}{Q} \)
Substitute the values into the formula:
\( E_d = \frac{2}{-1} \times \frac{5}{10} \)
\( E_d = -2 \times 0.5 \)
\( E_d = -1 \)
Since elasticity is generally considered in absolute terms, \( |E_d| = 1 \). This indicates unitary elasticity.
In simple words: We calculated how much the price changed and how much the quantity demanded changed. Then, we used a formula to find the elasticity, which turned out to be 1. This means the demand is unit elastic, where the change in demand is proportional to the change in price.

🎯 Exam Tip: Always show all steps clearly: identify given values, calculate changes (\( \Delta P, \Delta Q \)), state the formula, substitute values, and provide the final result with interpretation (elastic, inelastic, unitary).

 

Question 2. A consumer buys 50 units of a good at Rs 4 per unit. When its price falls by 25 per cent, its demand rises to 100 units. Find out the price elasticity of demand.
Answer:
Given:
Initial Price \( P = \text{Rs } 4 \)
Initial Quantity \( Q = 50 \) units
Demand rises to \( Q_1 = 100 \) units
Price falls by 25%.
First, calculate the new price (\( P_1 \)):
Price fall = \( 25\% \text{ of Rs } 4 = 0.25 \times 4 = \text{Rs } 1 \)
New Price \( P_1 = P - \text{Price fall} = 4 - 1 = \text{Rs } 3 \)
Now, calculate the change in price (\( \Delta P \)) and change in quantity (\( \Delta Q \)):
\( \Delta P = P_1 - P = 3 - 4 = - \text{Rs } 1 \)
\( \Delta Q = Q_1 - Q = 100 - 50 = 50 \) units
Use the price elasticity of demand formula:
\( E_d = \frac{\Delta Q}{\Delta P} \times \frac{P}{Q} \)
Substitute the values:
\( E_d = \frac{50}{-1} \times \frac{4}{50} \)
\( E_d = -1 \times 4 \)
\( E_d = -4 \)
Taking the absolute value, \( |E_d| = 4 \). This means demand is highly elastic (greater than unity).
In simple words: First, we figured out the new price after a 25% drop. Then, we calculated how much the quantity bought changed. Using these numbers in the elasticity formula, we found that demand is very elastic, meaning people buy a lot more when the price goes down.

🎯 Exam Tip: Pay close attention to percentage changes for price or quantity. Always convert percentages to absolute values before applying them in the elasticity formula. Remember to state whether demand is elastic, inelastic, or unitary.

 

Question 3. As a result of 10% fall in price of a good, its demand rises from 100 units to 120 units. Find out the price elasticity of demand.
Answer:
Given:
Percentage fall in Price = 10%
Initial Quantity \( Q = 100 \) units
New Quantity \( Q_1 = 120 \) units
First, calculate the change in quantity (\( \Delta Q \)):
\( \Delta Q = Q_1 - Q = 120 - 100 = 20 \) units
Now, calculate the percentage change in quantity demanded:
Percentage change in Quantity Demanded = \( \frac{\Delta Q}{Q} \times 100 = \frac{20}{100} \times 100 = 20\% \)
Use the percentage method formula for price elasticity of demand:
\( E_d = \frac{\text{Percentage Change in Quantity Demanded}}{\text{Percentage Change in Price}} \)
Substitute the values:
\( E_d = \frac{20\%}{-10\%} \) (The price *fall* means a negative change)
\( E_d = -2 \)
Taking the absolute value, \( |E_d| = 2 \). This means demand is elastic (greater than unity).
In simple words: The price dropped by 10%, and the quantity people wanted increased by 20%. When we divide the percentage change in quantity by the percentage change in price, we get 2, which means demand is elastic because it changed more than the price.

🎯 Exam Tip: When given percentage changes directly, use the percentage method formula for elasticity. Be careful with signs: a price fall implies a negative percentage change in price, which will result in a negative elasticity value. Always provide the absolute value and interpretation.

 

Question 4. Calculate the price elasticity of demand by proportionate/percentage method if \( Q_1 \) = 4,000, \( Q_2 \) = 5,000, \( P_1 \) = Rs 20, \( P_2 \) = Rs 19.
Answer:
Given:
Initial Quantity \( Q_1 = 4,000 \) units
New Quantity \( Q_2 = 5,000 \) units
Initial Price \( P_1 = \text{Rs } 20 \)
New Price \( P_2 = \text{Rs } 19 \)
First, calculate the change in quantity (\( \Delta Q \)) and change in price (\( \Delta P \)):
\( \Delta Q = Q_2 - Q_1 = 5,000 - 4,000 = 1,000 \) units
\( \Delta P = P_2 - P_1 = 19 - 20 = - \text{Rs } 1 \)
Now, calculate the percentage change in quantity and price:
Percentage Change in Quantity Demanded = \( \frac{\Delta Q}{Q_1} \times 100 = \frac{1,000}{4,000} \times 100 = 25\% \)
Percentage Change in Price = \( \frac{\Delta P}{P_1} \times 100 = \frac{-1}{20} \times 100 = -5\% \)
Use the proportionate/percentage method formula:
\( E_d = \frac{\text{Percentage Change in Quantity Demanded}}{\text{Percentage Change in Price}} \)
Substitute the values:
\( E_d = \frac{25\%}{-5\%} \)
\( E_d = -5 \)
Taking the absolute value, \( |E_d| = 5 \). This indicates that demand is elastic (greater than unity).
In simple words: We found how much the quantity and price changed in percentages. Then, by dividing the percentage change in quantity by the percentage change in price, we got 5, showing that demand is elastic. This means demand is very sensitive to price changes.

🎯 Exam Tip: Be careful with initial and new values for \( Q \) and \( P \). The formula typically uses the initial values for the base of percentage calculations unless it's an arc elasticity problem. Double-check your calculations for percentage changes.

 

Question 5. Below is given a demand equation \( Q = -6P + 400 \). Calculate price elasticity of demand if price is (i) Rs 4, (ii) Rs 10 and, (iii) Rs 15. Is the demand at these prices elastic or inelastic?
Answer:
The demand equation is \( Q = -6P + 400 \).
To find elasticity, we need \( \frac{dQ}{dP} \) (the derivative of Q with respect to P), which is the slope of the demand curve.
From the equation, \( \frac{dQ}{dP} = -6 \).
The formula for point elasticity of demand is \( E_d = \frac{dQ}{dP} \times \frac{P}{Q} \).
(i) If price \( P = \text{Rs } 4 \):
First, find quantity \( Q \) at \( P = \text{Rs } 4 \):
\( Q = -6(4) + 400 = -24 + 400 = 376 \) units
Now, calculate \( E_d \):
\( E_d = -6 \times \frac{4}{376} = -6 \times 0.010638 = -0.0638 \) (approx)
\( |E_d| = 0.0638 \). Since \( |E_d| < 1 \), demand is inelastic.
(ii) If price \( P = \text{Rs } 10 \):
First, find quantity \( Q \) at \( P = \text{Rs } 10 \):
\( Q = -6(10) + 400 = -60 + 400 = 340 \) units
Now, calculate \( E_d \):
\( E_d = -6 \times \frac{10}{340} = -6 \times 0.02941 = -0.1765 \) (approx)
\( |E_d| = 0.1765 \). Since \( |E_d| < 1 \), demand is inelastic.
(iii) If price \( P = \text{Rs } 15 \):
First, find quantity \( Q \) at \( P = \text{Rs } 15 \):
\( Q = -6(15) + 400 = -90 + 400 = 310 \) units
Now, calculate \( E_d \):
\( E_d = -6 \times \frac{15}{310} = -6 \times 0.048387 = -0.2903 \) (approx)
\( |E_d| = 0.2903 \). Since \( |E_d| < 1 \), demand is inelastic.
In simple words: For a given demand equation, we used a special formula to find the elasticity at different prices. We found that at prices of Rs 4, Rs 10, and Rs 15, the demand is inelastic. This means that at these prices, the quantity demanded does not change much even if the price changes.

🎯 Exam Tip: For demand functions, remember that \( \frac{dQ}{dP} \) is the slope. Calculate \( Q \) for each given \( P \) value before applying the elasticity formula. Always state whether demand is elastic or inelastic based on the absolute value of elasticity.

 

Question 6. At Rs 5 per unit, a consumer buys 40 units of a commodity and the price elasticity of his demand is (-)2. How much will he buy if the price reduces to Rs 4 per unit?
Answer:
Given:
Initial Price \( P = \text{Rs } 5 \)
Initial Quantity \( Q = 40 \) units
Price Elasticity of Demand \( E_d = -2 \)
New Price \( P_1 = \text{Rs } 4 \)
We need to find the New Quantity \( Q_1 \).
First, calculate the change in price (\( \Delta P \)):
\( \Delta P = P_1 - P = 4 - 5 = - \text{Rs } 1 \)
The formula for price elasticity of demand is \( E_d = \frac{\Delta Q}{\Delta P} \times \frac{P}{Q} \).
Substitute the known values:
\( -2 = \frac{\Delta Q}{-1} \times \frac{5}{40} \)
\( -2 = \frac{\Delta Q}{-1} \times \frac{1}{8} \)
\( -2 = \frac{\Delta Q}{-8} \)
Multiply both sides by -8:
\( -2 \times -8 = \Delta Q \)
\( 16 = \Delta Q \)
So, the change in quantity demanded (\( \Delta Q \)) is 16 units.
Now, calculate the new quantity \( Q_1 \):
\( Q_1 = Q + \Delta Q = 40 + 16 = 56 \) units
Therefore, the consumer will buy 56 units if the price reduces to Rs 4 per unit.
In simple words: We know the starting price, quantity, and how sensitive demand is. When the price drops, we use the elasticity formula to figure out how much more the person will buy. It turns out they will buy 56 units.

🎯 Exam Tip: When given elasticity and asked to find a new quantity, rearrange the elasticity formula to solve for \( \Delta Q \). Be careful with the signs of \( \Delta P \) and \( E_d \) during calculation.