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10/26/2016
background
Chepter-4
•Why do buyers of some products respond to price
increases by substantially reducing their purchases
Elasticity
while buyers of other products (say, gasoline) respond
by only slightly cutting back their purchases?
•Why do higher market prices for some products (for
By
Mustansar Mahmood
example, chicken) cause producers to greatly increase
their output while price rises for other products (say,
gold) cause only limited increases in output?
10/26/2016
NBS, NUST, Islamabad
Fall 2016
1
10/26/2016
Elasticity
• Why does the demand for some products (for
example, books) rise a great deal when
household income increases while the
demand for other products (say, milk) rises
just a little?
• The degree to which changes in prices and
incomes affect supply and demand
...
• How much more or less will be demand of a
commodity as a result of change in price?
– Depends upon the nature o f a product, price range
and time
...
• Elastic and inelastic demand
...
– by using percent ages, we c an correct ly comp are consu mer
responsiveness to ch anges in the prices of different
products
...
– For the purpose of interpretation
...
In such cases, Ed >1
...
In such cases, Ed <1
...
10/26/2016
10/26/2016
NBS, NUST, Islamabad
NBS, NUST, Islamabad
2016
•
•
•
– Where a price change results in no change
whatsoever in the quantity demanded, economists
say that demand is perfectly inelastic
...
• A line p arallel to th e v ertical axis, shows p erfectly
inelastic demand graphically
...
• A line p arallel to the horizontal axis, shows p erfectly
elastic demand
...
If total revenue changes in the opposite direction
from price, demand is elastic
...
If total revenue does not change when price
changes, demand is unit-elastic
...
when price and total revenue move in
opposite directions, demand is elastic
...
when price and total revenue move in the
same direction, demand is inelastic
...
when price changes and total revenue
remains constant, demand is unit-elastic
10/26/2016
NBS, NUST, Islamabad
Fall 2016
13
Price Elasticity along a Linear
Demand Curve
10/26/2016
NBS, NUST, Islamabad
Fall 2016
15
10/26/2016
NBS, NUST, Is lamabad
2016
Fall
14
Price Elasticity along a Linear
Demand Curve
10/26/2016
NBS, NUST, Islamabad
Fall 2016
16
Determinants of Price Elasticity of
Demand
1
...
2
...
3
...
10/26/2016
NBS, NUST, Islamabad
Fall 2016
17
4
...
Consumers often need time to
adjust to changes in prices
...
– For policymakers it means th at achieving the go al of higher
total farm income requires that farm output be restricted
...
– Becaus e a high er t ax on a produ ct with elastic demand will
bring in less tax revenue, legislatures tend to seek out
products that have inelastic demand
...
The easier and more rapidly producers can shift
resources between alternative uses, the greater the
price elasticity of supply
...
The farmer’s costs of production, incidentally, will
not enter into this decision to sell
...
– Factors such as increas ed popu lation, higher income, and
greater enthusi asm for collectin g antiques have increas ed
the d eman d for antiqu es over time, but th e supp ly of
antiques is limited and inelastic, t hose increas es in d emand
have greatly boosted the prices of antiques
•
Volatile Gold Prices:
– The main sources of th es e fluct uations are shifts in d emand
interacting with highly inelastic supply
...
𝐸𝑥𝑦 =
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦 𝑋
𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦 𝑌
10/26/2016
NBS, NUST, Islamabad
Fall 2016
•
•
•
25
Substitute Goods If cross elasticity of demand is
positive, meaning that sales of X move in the same
direction as a change in the price of Y, then X and Y
are substitute goods
...
So the two are complementary goods
...
10/26/2016
NBS, NUST, Islamabad
Fall 2016
Income Elasticity of Demand
•
•
•
Income elasticity of demand measures the degree to
which consumers respond to a change in their
incomes by buying more or less of a particular good
...
Inferior Goods A negative income-elasticity
coefficient designates an inferior good