Q7. Answer the following: 1+3
a) “Petrol is becoming cheaper, yet the demand for cars is not rising.” Does it mean that the law of demand is not operative?
b) The quantity demanded of a commodity at a price of rupees 8 per unit is 600 units. Its price falls by 25% and the quantity demanded rises by 120 units calculate the price elasticity of demand. Is its demand elastic? Give reason.
Dear Student
Dear Student
(a) Consumption of luxury goods like cars depends on many factors . It depends on the price of cars also .
Suppose petrol gets cheaper but car prices are rising the demand for cars might not rise . Then suppose due to pollution people are getting conscious and using bicycles more . There can be many other instances like invention of electronic cars . New technology reduces the usage of petroleum in automobiles .
So price change of petrol does not affect car consumption in this case . But from these instances we can never say that law of demand is not valid . Because the law clearly states that other factors remaining constant ( Ceteris Paribus ) Price and quantity demanded are negatively related to each other . Since other factors are also changing in the above case so the law is not holding true for the case .
(b)
Since Ed= -0.8 and Ed is less than 1 ( 0.8 < 1), so demand is not elastic.
Regards
Dear Student
(a) Consumption of luxury goods like cars depends on many factors . It depends on the price of cars also .
Suppose petrol gets cheaper but car prices are rising the demand for cars might not rise . Then suppose due to pollution people are getting conscious and using bicycles more . There can be many other instances like invention of electronic cars . New technology reduces the usage of petroleum in automobiles .
So price change of petrol does not affect car consumption in this case . But from these instances we can never say that law of demand is not valid . Because the law clearly states that other factors remaining constant ( Ceteris Paribus ) Price and quantity demanded are negatively related to each other . Since other factors are also changing in the above case so the law is not holding true for the case .
(b)
Since Ed= -0.8 and Ed is less than 1 ( 0.8 < 1), so demand is not elastic.
Regards