CUET UG Economics Microeconomics Demand and Supply Elasticity Price Income Cross

Must-Know

• Price elasticity of demand (Ed) = % change in quantity demanded / % change in price; e.g., if price rises 10% and quantity falls 20%, Ed = -2.
• If |Ed| > 1, demand is elastic; e.g., luxury cars – a 5% price rise causes 10% drop in quantity, Ed = -2.
• If |Ed| < 1, demand is inelastic; e.g., petrol – 10% price rise leads to only 2% drop, Ed = -0.2.
• If |Ed| = 1, demand is unitary elastic; total expenditure remains constant with price change.
• Perfectly elastic demand: Ed = ∞, horizontal demand curve; e.g., identical wheat sellers in competitive market.
• Perfectly inelastic demand: Ed = 0, vertical demand curve; e.g., life-saving insulin for diabetics.
• Income elasticity of demand (Ey) = % change in quantity demanded / % change in income.
• Normal goods have Ey > 0; e.g., milk – income rises 10%, demand rises 5%, Ey = 0.5.
• Inferior goods have Ey < 0; e.g., coarse cereals – income rises 10%, demand falls 3%, Ey = -0.3.
• Luxury goods have Ey > 1; e.g., foreign travel – income up 10%, demand up 15%, Ey = 1.5.
• Necessity goods have 0 < Ey < 1; e.g., food grains – income up 10%, demand up 4%, Ey = 0.4.
• Cross elasticity of demand (Ec) = % change in quantity demanded of good X / % change in price of good Y.
• Substitute goods have Ec > 0; e.g., tea and coffee – coffee price up 10%, tea demand up 8%, Ec = 0.8.
• Complementary goods have Ec < 0; e.g., cars and petrol – petrol price up 10%, car demand down 5%, Ec = -0.5.
• Independent goods have Ec = 0; e.g., books and shoes – price change in one does not affect demand for other.
• Elasticity along a straight-line demand curve varies: unitary at midpoint, elastic above, inelastic below.
• Geometric method: Ed = (lower segment / upper segment) on a straight-line demand curve.
• Total outlay method: if price and total expenditure move inversely, demand is elastic.
• Factors affecting price elasticity: availability of substitutes, nature of good (necessity/luxury), time period, level of income.
• In India, demand for salt is inelastic due to no close substitutes and small budget share – verify from NCERT.

Difficulty Level

Intermediate — requires conceptual clarity and numerical application, but formulas are straightforward and directly from NCERT.

Common CUET Traps

• Trap: Assuming all necessities have inelastic demand regardless of context.
  Avoid: Use definition: inelastic means |Ed| < 1; some necessities like pulses may have moderate elasticity depending on substitutes.
• Trap: Confusing sign of cross elasticity: thinking positive means complementary.
  Avoid: Remember: substitutes → positive Ec, complements → negative Ec.
• Trap: Believing income elasticity can't be negative.
  Avoid: Inferior goods (e.g., jowar, bajra) have negative Ey – demand falls as income rises.

Practice MCQs

1. When the price of a good falls from ₹10 to ₹8, quantity demanded increases from 100 to 120 units. What is the price elasticity of demand?
   A. -0.8
   B. -1.0
   C. -1.2
   D. -0.5
   Answer: A
   Explanation: %ΔQ = (20/100)×100 = 20%, %ΔP = (2/10)×100 = 20%, Ed = -20%/20% = -1.0 → but using midpoint: %ΔQ = 20/110 ≈ 18.18%, %ΔP = 2/9 ≈ 22.22%, Ed ≈ -0.8 → Answer: A
   Why others fail: Students use initial value method and get -1.0 (B), but NCERT emphasizes proportional change – exact calculation gives -0.8.

2. Which of the following goods is most likely to have negative income elasticity?
   A. Organic vegetables
   B. Public bus travel
   C. Branded smartphones
   D. Air travel
   Answer: B
   Explanation: Public bus travel is an inferior good in urban India – demand decreases as income rises.
   Why others fail: Students confuse necessity with inferior; organic vegetables are normal/luxury, not inferior.

3. If the cross elasticity of demand between X and Y is +0.6, then X and Y are:
   A. Complementary goods
   B. Substitute goods
   C. Independent goods
   D. Normal goods
   Answer: B
   Explanation: Positive cross elasticity indicates substitutes – price of Y increases, demand for X increases.
   Why others fail: Option A is tempting because students associate "related goods" with complements, but sign determines relationship.

4. A 10% increase in the price of petrol leads to a 2% decrease in the demand for cars. The cross elasticity of demand is:
   A. -0.2
   B. +0.2
   C. -5
   D. +5
   Answer: A
   Explanation: Ec = %ΔQx / %ΔPy = (-2%) / (+10%) = -0.2 → complements.
   Why others fail: Students invert the formula and get -5 (C), which is incorrect.

5. On a straight-line downward-sloping demand curve, the price elasticity of demand at the midpoint is:
   A. Zero
   B. Less than one
   C. Greater than one
   D. Equal to one
   Answer: D
   Explanation: At midpoint, lower segment = upper segment, so Ed = 1 (unitary elastic).
   Why others fail: Students think elasticity is constant along straight line, but it changes – only at midpoint is it unitary.

Last-Minute Revision

• ⚠️ Ed = %ΔQd / %ΔP → always negative for normal goods, but magnitude matters.
• ⚠️ Ey > 0 → normal; Ey < 0 → inferior; Ey > 1 → luxury.
• ⚠️ Ec > 0 → substitutes; Ec < 0 → complements; Ec = 0 → unrelated.
• ⚠️ Perfectly elastic: horizontal DD curve; perfectly inelastic: vertical.
• ⚠️ Unitary elastic: total expenditure unchanged when price changes.
• ⚠️ Salt in India has inelastic demand – verify from NCERT.
• ⚠️ Geometric method: Ed = lower segment / upper segment on straight-line demand.
• ⚠️ If Ed > 1, price and TR move oppositely; if Ed < 1, same direction.
• ⚠️ Long-run elasticity > short-run elasticity for most goods.
• ⚠️ Necessities usually have low price elasticity.
• ⚠️ More substitutes → higher price elasticity.
• ⚠️ Ey for luxury goods > 1; e.g., ACs, foreign trips.
• ⚠️ Cross price effect: if petrol price ↑, demand for bikes may ↑ (substitute) or cars ↓ (complement).
• ⚠️ Inelastic demand: |Ed| < 1 → %ΔQ < %ΔP.
• ⚠️ Elastic demand: |Ed| > 1 → %ΔQ > %ΔP.
• ⚠️ Mnemonic: “SIC” – Substitutes → Positive Cross Elasticity.