Assignment on elacticity of demand

its all about elasticity of demand

1. Assignment on Elasticity Of Demand
Subject: Economics
IHSAN ULLAH 5/20/16 ROLL # 11



Name: IHSAN ULLAH
Roll No. : 11
Section: A
LLB First Year
Assignment on Elasticity
of Demand
Submitted To Respected
Sir Nizam
Date: 20/05/2016
Economics

2. 1 | Page


Table of Contents
ELACTICITY OF DEMAND .................................................. 2
THE PRICE ELACTICITY OF DEMAND ........................... 2
Mid-Point Formula ................................................................... 3
INELASTIC DEMAND (E d < 1) ............................................ 3
Figure 1. Inelastic demand ....................................................... 3
ELASTIC DEMAND (E d > 1) .................................................. 4
Figure 2. Elastic demand .......................................................... 4
PERFECTLY ELASTIC DEMAND (E d =∝) ...................... 5
Figure 3. Perfectly elastic demand .......................................... 5
PERFECTLY INELASTIC DEMAND (E d = 0)..................... 6
Figure 4. Perfectly inelastic demand ....................................... 6
UNITARY DEMAND (E d = 1) .............................................. 7
Figure 5. Unitary elasticity ....................................................... 7
INCOME ELACTICITY OF DEMAND ................................ 8
CROSS ELACTICITY OF DEMAND ................................... 8

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ELACTICITY OF DEMAND
The law of demand states that, all else being constant, as the price of a product
increases (↑), quantity demanded falls (↓); likewise, as the price of a product
decreases (↓), quantity demanded increases (↑).
The economists here use and measure the quantity demanded of a good to a
change in price by the concept of price elasticity of demand or in other word we
use “Elasticity of demand”
Price elasticity of demand measures the responsiveness of demand to changes
in price for a particular good. If the price elasticity of demand is equal to 0,
demand is perfectly inelastic (i.e., demand does not change when price changes).

THE PRICE ELACTICITY OF DEMAND
Price elasticity of demand (PED or Ed), the ratio of proportionate change in
quantity demanded caused by a given proportionate change in price.
Price elasticity of demand is computed by dividing the percentage change in the
quantity of a good by the percentage change in its price.
Ed = Percentage change in quantity demanded
Percentage change in price

Ed= %ΔQ/%ΔP
Ed= ΔQ/Q*100 ΔP/P*100
Ed= ΔQ/Q*100 ΔP/P*100
Ed= ΔQ/Q*P/ΔP
Ed= Q2-Q1/Q1*P1/P2-P1

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Mid-Point Formula
Price Elasticity of demand= (Q2-Q1)/ [(Q2+Q1)/2]
(P2-P1)/ [(P2+P1)/2]
INELASTIC DEMAND (Ed < 1)
A change in price causes a less than proportionate change in quantity demand,
demand is said to be inelastic.
Quantity demanded does not respond strongly to price changes.
Price elasticity of demand is less than one or less than unity.
A change in price results in only a small change in Quantity demanded. In other
words, the quantity demanded is not very responsive to changes in price.
Examples of this are necessities like food and fuel.
Consumers will not reduce their food purchases if Food prices rise, although there
may be shifts in the Types of food they purchase. Also, consumers will Not greatly
change their driving behavior if gasoline Prices rise.
Figure 1. Inelastic demand
Y D


A __________________
∆&#3627408477;

C
Price
D’

∆&#3627408478;


0 B N X
Quantity

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ELASTIC DEMAND (Ed > 1)
When a change in price leads to a more than proportionate change in quantity
demanded, the demand is said to be elastic.
Quantity demanded responds strongly to changes in price.
Price elasticity of demand is greater than one.
Elasticity of demand is illustrated that a change in price results in a large change in
Quantity demanded. An example of products with an elastic demand is consumer
durables. These are Items that are purchased infrequently, like a washing Machine
or an automobile, and can be postponed if Price rises. For example, automobile
rebates have been very successful in increasing automobile sales by reducing price.
Figure 2. Elastic demand
Y

D
A _________________
Price ∆??????
C

D’


∆&#3627408478;


0 B N X

Quantity

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PERFECTLY ELASTIC DEMAND (Ed =∝)
A Demand is perfectly elastic when with a small increase in the price of a good, its
quantity demanded by the consumer’s drops down immediately to Zero.
Figure 3. Perfectly elastic demand



Y

Price
6

D D’
4


2



0 10 20 30 40 X
Quantity

7. 6 | Page

PERFECTLY INELASTIC DEMAND (Ed = 0)
When the quantity demanded of a good does not change at all to whatever change
in price the demand is said to be perfectly inelastic or the elasticity of demand is
zero.
Quantity demanded does not respond to price changes.
Figure 4. Perfectly inelastic demand
Y D

C ----------------------------


B --- ∆P

Price
A ---------------------------


0
M X
Quantity

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UNITARY DEMAND (Ed = 1)
When the quantity demanded of a good changes by exactly the same percentage as
price, the demand is said to have a unitary elasticity.
Quantity demanded changes by the same percentage as the price
If the elasticity coefficient is equal to one, demand is unitarily elastic as shown in
Figure 3. For example, a 10% quantity change divided by 10% price Change is
one. This means that a one percent change in quantity occurs for every one percent
change in
Price.
Figure 5. Unitary elasticity

Y D


A _________________ a



Price
C ___________________________________ b’
D’



0 B D X
Quantity

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INCOME ELACTICITY OF DEMAND
Income is an important variable affecting the demand for a good. When there is a
change in the level of income of a consumer, there is a change in the Quantity
demanded of a good, other factors remains constant. The degree of a change or
responsiveness of quantity demanded of a good to a change in the income of a
consumer is called income elasticity of demand.
Ey = Percentage change demand
Percentage change in income

Ey= ΔQ/ΔY*Y/Q = ΔQ/ΔY*Y/Q


CROSS ELACTICITY OF DEMAND
The concept of cross elasticity of demand is used for measuring the responsiveness
of quantity demanded of a good to Changes in the price of related goods, Cross
elasticity of demand is defined as the percentage change in the demand of one
good as a result of the percentage change in the price of another good.
The formula for measuring cross elasticity of demand is:
Exy = Percentage change in Quantity demand of Good X
Percentage change in Price of Good Y