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Introduction to Economics - Elasticity of Demand
The Law of Demand Indicates the direction of change in the quantity demanded of a result of change in price. It doesnot fell in the extend by which the demand with change in response to change in price of the product economist here ease and measure the responsiteness of quantity demanded to a change in price by the concept of elasticity of demand.
Elasticity of demand shows the expension and contraction in demand with respect to change in price.
* 1 Price Elasticity of Demand
* 2 Degree Of Price Elasticity Of Demand
* 3 Measurement of Prize Elasticity of Demand
* 4 Types of Elasticity
* 5 Factors Determining Elasticity of Demand
* 6 Conclusion
Price Elasticity of Demand
Price Elasticity of demand response the expension or contraction in demand is response to change in price.
Ep = Proportunate change in quantity demand / Proportunate change in price
Ep = D f/q / Dp/p
Degree Of Price Elasticity Of Demand
Degree of elasticity of demand falls into five catagories.
1. Perfectly elastic demand
2. Perfectly Inelastic demand
3. Unitory elasticity
4. Relatively elastic demand
5. Relatively Inelastic demand
1. Perfectly Elestic Demand.
A demand is properly elastic demand when amount demanded of a good at the ruling price is infinite. Imperfectly elastic demand when ruling price fall the consumer by much good while when price level increase the consumer leave the use of product or says demand is equal to zero.
2. Perfectly Inelastic Demand.
Perfectly Inelastic demand shows that there is no change in demand is response to change in prize. It refers the elasticity of demand is equal to zero.
3. Unitary Elasticity of Demand
Such demand in which percentage change in price is equal to percentage change in quantity we said the demand is unitary elastic.
4. Relatively Elastic Demand
Relatively elastic demand shows the percentage change in quantity demanded is higher is response to percentage change in price like suppose the 10% change in price leads the 20% change in quantity then.
5. Relatively Inelastic Demand
Relatively Inelastic shows that % change in quantity is less in response to % change in prize.
When, Ed < 1, we said Relatively inelastic demand.
Measurement of Prize Elasticity of Demand
There are three methods of measuring elasticity of demand.
1. Revenue Method
2. Propotional Method
3. Graphic Method
1. Revenue Method
According to this method elasticity of demand can be measured from the change in the total revenue of the firm as the increase or decrease the prices of the goods.
Elasticity is expressed in three ways.
A. Unit elastic demand
B. Elastic demand
C. In elastic demand
A. Unit Elastic Demand
When the increase or decrease in the price of goods leads to firm total revenue remain the same we said this is Unit Elastic Demand.
A Negatively r/s small changes in price of the good and the total revenue of the firm. When a firms lowers the prize its total revenue rises and when it increase the price of a good its total revenue falls.
C. Inelastic Demand
In case of Inelastic demand a relation exist between change in price of a good and the total revenue of the firm.
When a firm raise the price of a good its total revenue goes up and when its lower the prize the total revenue of the firm goes down.
Price of Per Dozens (Rs) P | Quantity Demanded Q | Total Revenue TR = PxQ | Elasticity
1.50 ................................. 3 ........................... 4.50 ...................... > 1
1.25 ................................. 4 ........................... 5.00
1.00 ................................. 5 ........................... 5.00 ...................... = 1
0.75 ................................. 6 ........................... 4.50
0.60 ................................. 7 ........................... 4.20 ...................... < 1
0.50 ................................. 8 ........................... 4.00
2. The Propotional Method Or Percentage Method
This method relates to point elasticity we coupare the % change in price with the % change in demand. The elasticity of demand is the ratio of % change in quantity demanded of a product to the % change in price.
Elasticity of Demand = Propotionate change in demand / Propotionate change in price
Elasticity of Demand always Negative but we taken positive value between we noted fallen price in followed by rise in demand means demand is always Negatively Sloped.
3. Geometric Measurement of Elasticity OR The Point Method.
The price elasticity of demand also be measured at any point on the demand curve. It is noted that demand is unitory at mid point of demand curve the total revenue is maximum at this point. Any point above unitory point shows elasticity is greater than 1 ( means price relation in this point leads to an increase in the total revenue.
Any point below midpoint below midpoint shows elastic is less than 1 means price relation in these point lead to reduction in the total revenue.
Qs. Define Elasticity of Demand and distinguish between point Elasticity and are elasticity?
The point elasticity regers to elasticity of demand at a point of demand curve. the change in price and reseltant changed in demand are very very Small.
We use are of demand curve to measure elasticity when price changed are big we use the average of the two prices.
Are elasticity is a measure of the measure responsivemess to price changes exhibited by a demand curve over same finite strech the curve.
PM is an are which measures elasticity over a certain range of prices and quantities. We noted from the fig. that elasticity is difference of different point.
Now suppose at point P on the demand.
These results shows that the point method of measuring elasticity at two Points on a demand curve gives different elasticity Coefficient.
In order to avoid this problem, we use an average of the two values is calculated on the basis of following formula
Q1 - Q2/Q1 + Q2 divided P1-P2/P1+P2
This result is more satisfactory then the two different elasticity coefficient arrived at by the point elasticity Method.
The closer the two points P and M are the more accurate will be the measure of elasticity on the basis of are elasticity.
Are elasticity is the elasticity of mid-point of P and M
Types of Elasticity
The demand depends upon various factors such as the price of a commodity, the money income of consumer the prices of related good the taste of the people etc.
The elasticity of Demand measures responsiveness of quantity demanded to a change in any one of the above factors by keeping other factors constant.
There are three major types of elasticity.
1. Price elasticity
2. Income elasticity
3. Cross elasticity
1. Price Elasticity of Demand.
If measures the responsiveness of demand to small changes in price.
Ep = Proportionate change in quantity demand / Proportionate change in Price
2. Income Elasticity.
It measures the changes in Demand due to change in income.
Income Elasticity = Proportionate change in Quantity Demand / Proportionate Changes in Income
Measurement of Income Elasticity
Its measure in same way as price elasticity measure.
For Example: If the income of a consumer increases by 5% the prices of all other goods remain constant, the purchase of the consumer for good X increases by 10%.
If Income increase 5% and demand increases 5% is result than.
3. Cross Elasticity of Demand
It measures a change in price of one good causes a change in demand for another.
Change in price of substitutes goods result change in Demand for the goods.
Cross Elasticity of Substitutes
When such goods who are substitute to each other. Like Tea and Coffee, Butter & Jam etc. An increase in the price of one good result the increase in quantity demands for other.
Factors Determining Elasticity of Demand
There are several factors which determine the elasticity of demand.
1. For Necassary the Demand is Inelastic Or Less Elastic
For necassities of life demand do not effect much as response to change in price like (Salt, Wheat etc)
2. Demand for Luxuries is Elastic
When the price falls consumer buy more when price rise no one can purchase. These are the luxuries of life. Like we have to purchase a Flat in clifton buy a Car like BMW etc.
3. Demand for Substitutes is also elastic
When the price of one commodity increase demand for its substitutes increase.
4. Demand for Goods having Several Uses is Elastic
Coal is such a good Which is cheap and use for several purpose so demand for it is elastic.
5. Elasticity also depends on the Price Levels
If the price is either too high or low the demand will be less elastic.
6. Has If and Fashion
The demand for those goods which are habitually consumed or which are in fashion is elastic.
7. Future Expectation about Price Changer
If people think that price level include in future demand for it increases.
As we analyse these condition and sort that elasticity do not depend on a particular thing if changer time to time and place to place.
Introduction to Economics - Supply
The Theory of Supply
Supply is of the Scare goods. It is the amount of a commodity that seller are able and willing to offer for sale at different prices per unit of time.
Supply is a Schedule of the amount of a good that would be offered for sale at all possible prices at any period of time.
e.g. a dog, a week and so on.
It refers to that quality of the commodity which is actually brought into the market for sale at given price per unit of time.
Stock means that total quantity of a commodity which exist in market but cannot be offered for sale at a short notice.
The Law of Supply
Sellers supply more goods or high price than they are writting at a lower prices. Keeping other factor constant
If the price of a commodity rises seller, supply more goods while if the price decreases than they will supply less keeping other factor constant.
It is formed that the direct relation between quantity and supply and we can easily understand by supply schedule and supply curve.
From the Supply curve and Schedule we observed that the supply curve is positively sloped means that is direct relation between price and supply of the commodity.
The Supply function can also be explained it.
Qxs = f(Px, Tech, Si, Fn, X, .....)
Qxs = Quantity Supplied by commodity of x by the producer.
Px = Price of commodity X
Tech = Technology
Si = Supplies of Import.................. These are constant fact of production.
Fn = Feaditer of machine
X = Taxes / Subsidies
We can say supply is a function of
Qxs = f(Px)
Movement / Shift In Supply
According to the law of Supply that If the price increases supply increases so we can say that change in price curve change in Quantity Supply so movement along the curve happen at different price level while keeping other factor remain constant or we can say that there is movement along the curve is only price change and other factors remain constant.
When price is Pi Supplier offer Qi quality for sale while when price increases to P2 the offer Q2 which slow there is movement along the curve shift in Supply curve.
Where Ss = Actual Supply Curve
When price level Decrease due to other factors (Tech, Si, Fn, X, ....) the Actual Supply curve (Ss) shift upward to the left (Ss)
When price level increase due to other factor (Tech, Si, Fn, X, ....) the Actual Supply curve (Ss) Shift downward to the right (S2S2)
Non-Price Factor which can shift in Supply. These factors are
1. Change in Factor Prize
The rise or fall in supply may take place due changes in cost of production. If the input prizes which is used for making the commodity increases the cost of production.
2. Change in Technique
If there is improvement in technology then it will come reduction in cost of production.
3. Improvement in the Means of Transport
If there is improvement in communication in transport then if leads to minimize the cost of production.
4. Political Changes
The increase or decrease in supply also occurs due to political changes. If there is war in between two country then it will decrease the Supply.
If Government received heavy taxes on the Import of a commodity then the Supplies of these goods is reduced at each price.
6. Good of Firm
If firm expect higher price the future they produce in large scale.
Introduction to Economics - Demand
* 1 The Theory of Demand | The Meaning of Demand
* 2 The Law of Demand
* 3 The Individual's Demand For A Commodity
* 4 The Market Demand For A Commodity
* 5 Movement of Shifting Of Demand Curve
The Theory of Demand | The Meaning of Demand
Demand in economics means a desire to possess a good supported by willingness and ability to pay for it. like for example if we have a desire to certain commodity, but we do not have the adequate means to pay for it, it will simply be a wish, a desire or a want and not demand.
Demand is effective desire which is backed by willingness and ability to pay for a commodity in order to obtain it.
Characteristics of Demand in economics.
1. Willingness and ability to pay.
2. Demand is always at a price.
3. Demand is always per unit of time.
The Law of Demand
The law of demand states that people will buy more at lower prices and by less at higher price, other thing meaning the same.
When a price of a commodity increase quantity demanded is decreases and as the price decreases quantity demanded increases keeping other things constant.
Functionally Demand is defined as
Qd(x) = F(Px, M, Po, T, ....)
Px = Price of commodity
M = Money Income of the household
Po = Price of other commodities
T = Taste of household
Assumption of the Law
There are three main assumption of the law.
1. No change in the taste of Consumer (T)
2. Purchasing power must remain constant (M)
3. Price of all commodities remain constant (Po)
Exceptions to the Law of Demand
This law may be not valid for few cases like
1. Prestige Goods Some luxuries items are purchases as a mark of destination in Society. If the Price of these goods rises, the demand for them increases instead of falling.
2. Price Expectation If peoples expect rise in the price in future they may be violet this law.
3. Giffen Goods If the price of Giffen goods falls its demand also falls. There is the price effect in case of giffen goods.
The Individual's Demand For A Commodity
The individuals demand for a commodity is the amount of commodity which the consumer is willing to purchase at any given price over a specified period of time.
The Demand Schedule of a individual for a commodity is list or table of the different amounts of the commodity that are purchased in the market at different price per unit time.
Individual Demand Schedule for Trouser
Price per Trouser (P) | 800 | 600 | 500 | 450 | 400
Quantity Demand (Q) | 006 | 010 | 016 | 020 | 030
Demand Curve shows the relation between the price of a commodity and the amount of that commodity that consumer wishes to purchase.
The Market Demand For A Commodity
The Market demand for a Commodity is obtained by adding up the total quantity demanded at various prices by the entire individual over a specified period of time in the Market.
Market Demand Schedule
Price Per (KG) .....Demand of the Buyers
RS. ................... A | B | C | D | Total
20 ..................... 3 | 4 | 5 | 6 | 18
18 ..................... 4 | 5 | 6 | 7 | 22
16 ..................... 5 | 6 | 7 | 8 | 26
14 ..................... 6 | 7 | 8 | 9 | 30
12 ..................... 7 | 8 | 9 | 10 | 34
10 .................... 6 | 7 | 10 | 11 | 38
Market Demand Curve
Market demand Curve is also = very sloped like individual demand curve.
By analyzing the demand curve we note that when price fall the demand for the goods increase therefore the demand curve slopes from left to right
1. Law of diminishing marginal utility.
2. New Buyers.
3. Increase in Real Income.
4. Substitution Set.
1. Law of Diminishing Marginal Utility
The Law of demand is bases on the law of diminishing marginal utility. According to which, when a consumer purchase more units of a commodity, its marginal utility decline. The consumer, therefore will purchase more units of that commodity only if its price falls.
2. New Buyers
When the prices of a commodity falls those peoples also become capable to purchase who were not able before. The Demand increase due to entry of new buyers in the market and so demand curve slopes from left to right.
3. Increase in Real Income
Due to fall in price people purching power increases for that good so due to which demand curve is slopes rightward.
4. Substitution Set.
Suppose two substitutes commodity like tea and coffee and if the price of one commodity is decrease then people felt that other is expensive so they bye cheapest one.
If price of coffee decrease than tea seems to be expensive so people go for coffee.
Movement of Shifting Of Demand Curve
There are two ways to show demand curve
1. Movement along the demand curve.
2. Shifting of demand curve.
Movement along the Demand Curve
If only change in price of commodity and keeping other factors remain constant (Income etc) than we more along demand curve it is technically called extension and constraction in demand.
Extension ====> Increase in Demand
Constraction ====> Decrease in Demand
Shifting of Demand Curve
Demand Curve shift upward or downward due to change in demand, due to change in one or more factors other than price.
If there is increase in demand than curve moves upward.
If there is decrease in demand curve moves downward.
Introduction to Economics - Definition of Economics
* 1 MICRO ECONOMICS
* 2 ECONOMICS
* 3 SCARCITY
* 4 OPPORTUNITY COST
Uses of scare resources in order to get maximum satisfaction is said to be Economics.
An Economics is a mechanism that allocates scare resources among competing uses.
Scarcity is defined as we looking for more as the resources available now.
Economics is arise when we have following things.
What goods and services will produce and what quantity to produce.
How will be various good and services be produce.
for Whom will the various goods and services be produce.
Distribution of Economics benefit depends on the distribution of income and wealth.
Economics has two type.
A. Decision Maker.
B. Coordination Mechanism.
Any Person or organization of person that make choices are deals in decision market.
Decision Maker fall in to three group.
Economy is change country to country. Advance countries go for capital but some have limitation of qualified labour.
Economist use the term opportunity cost of emphasis that making choice in the fact of Scarcity implies a cost OR We go for best in order to forgone other upon them.
Economics other divided into two parts.
1. Micro Economics
2. Macro Economics
Micro Economics deals with single, individual or a particular firm, consumer or producer.
Macro Economics deals as whole or over all performance of economy like national income.
According to the Adam Smith
Economics is the study of wealth and according to him wealth is for man but not man is for wealth.
According to Robbins
Economics is the study of human behaviors as a relation between ends and scare moons which have alternate uses.
1. To get the maximum satisfaction from producer (House Hold Sector) supplier of loan.
2. They are lender of loan. They purchases their bonds.
1. To get profit from consumer pockets. (Business Sector) Desire the borrowed the loan.
2. Demand the loan. They print new loan to borrow the loan.