NYJC_H2_ECONS_Q1

1 1 Restaurant owners are now crying woes in Singapore as their profit margin has been hit hard due to rising rental and f ood costs. However, their most pressing issue is the lack of manpower a nd to make things worse, consumers are now tightening their belts due to the negative growth rate for the first quarter of the year. But not all hope is lost, with the rise of online food delivery services, restaura nts owners are now partnering them in the hope of attracting more customers. (a) Explain, using examples, the concepts of price elasticity of demand and income elasticity of demand. [10] (b) Discuss how the combination of the above factors af fect the market for different types of restaurant services in Singapore. [15] Suggested Answers (a) Explain, using examples, the concepts of price elasticity of demand and income elasticity of demand. [10] Command Word: Explain Context: No particular goods/services given. Need to provide examples. Content: PED & YED (Definition, Sign & Magnitude) Introduction: • Elasticity is a measure used to show how responsive one variable is to a change in another variable. • Explanation of PED & YED concepts will be based on definition, sign and magnitude Body: 1: PED • Definition: PED measures the responsiveness of quantity demand ed of a good due to a change in its price, ceteris paribus. • Formula: PED = Percentage Change in Quantity Demanded of Good A Percentage Change in Price of Good A

2 • Sign: Negative The negative sign of the coefficient of PED reflects the inverse relationship between price and quantity demanded (i.e. the law o f demand). The law of demand states that the quantity demanded of a product is inversely related to its price. Hence an increase in price leads to a fall in the quantity demanded, ceteris paribus. Based on the formula for calculating PED, the negative sign is the result of quantity demanded an d prices changing in opposite directions. • Magnitude: The magnitude of the PED value signifies the sensi tivity or responsiveness of quantity demanded due to the price change of the good. Generally the greater the responsiveness of quantity demanded due to price changes, the larger the magnitude If a price change causes a more than proportionate change in quantity demanded, quantity demanded is regarded as very responsive to price changes. Demand for the good is said to be price elastic . In Figure 1, for example, if price decreases by 10% and quantity demanded increases by 30%, the PED coefficient will be 3. If a price change results in a less than proportionate change in quantity demanded, quantity demanded is regarded as not very responsive to price changes. Demand for the good is said to be price inelastic . Price Quantity D % change in price = 10% % change in quantity demanded = 8% 0 Figure 2 Figure 1

3 As illustrated in Figure 2, for example,