I know this might be basic.....but I am still not sure about subject of elasticity? How do I know the effect, if no price or quantity demanded is given?
Assuming that the price elasticity of demand for automobiles in the United States is 1.2 and that the income elasticity of demand is 3:
a) What would be the effect of a 5 percent increase in auto prices on the quantity of autos demanded?
b) What would be the effect of a 2 percent increase in income on the quantity of autos demanded?
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To determine the effect of changes in price or income on the quantity of autos demanded, you can use the concepts of price elasticity of demand and income elasticity of demand.
a) The price elasticity of demand measures the responsiveness of the quantity demanded to changes in price. In this case, the price elasticity of demand for automobiles is given as 1.2, which means that a 1% increase in price will lead to a 1.2% decrease in the quantity demanded.
To find the effect of a 5% increase in auto prices on the quantity of autos demanded, you can multiply the percentage change in price by the price elasticity of demand: 5% increase in price x (-1.2) (negative sign indicates a decrease) = -6% change in quantity demanded. So, a 5% increase in auto prices would lead to a 6% decrease in the quantity of autos demanded.
b) The income elasticity of demand measures the responsiveness of the quantity demanded to changes in income. In this case, the income elasticity of demand for automobiles is given as 3, which means that a 1% increase in income will lead to a 3% increase in the quantity demanded.
To find the effect of a 2% increase in income on the quantity of autos demanded, you can multiply the percentage change in income by the income elasticity of demand: 2% increase in income x (+3) (positive sign indicates an increase) = +6% change in quantity demanded. So, a 2% increase in income would lead to a 6% increase in the quantity of autos demanded.
In summary:
a) A 5% increase in auto prices would result in a 6% decrease in the quantity of autos demanded.
b) A 2% increase in income would result in a 6% increase in the quantity of autos demanded.