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Economics (Complete 2set)

Economics (Complete 2set)

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Published by: Shantibhusan Srivastava on Apr 26, 2010
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NameSB SrivastavaRoll No.511017032ProgramMBASubjectManagerial Economics[Set 1]CodeMB0042LearningCentreKarrox Technologies(Andheri Centre,Mumbai.Centre Code: 02974).
Mention the demand function. What is elasticity of demand? Describe thedeterminants of elasticity of demand.
Demand Function:
The demand for a product or service is affected by its price, the income of the individual, theprice of other substitutes, population, and habit. Hence we can say that demand is a functionof the price of the product, and others as mentioned above.Demand function is a comprehensive formulation which specifies the factors that influence thedemand for a product. Mathematically, a demand function can be represented in the followingmanner.Dx = f (Px, Ps, Pc, Ep, Y, Ey, T, W, A, U….etc) WhereDx = Demand for commodity XPx = Price of a commodity XPc = Price of the complementsY = Income of the consumeT = Tastes and preferencesA = Advertisement and its impactPs = Price of substitutesEp = Expected future priceEy= Expected income in the futureW= Wealth of the consumer U = All other determinants
Elasticity of demand
In economics the term elasticity refers to a ratio of the relative changes in two quantities. Itmeasures the responsiveness of one variable to the changes in another variable.
Elasticity of demand is generally defined as the responsiveness or sensitiveness of demand to a given change in the price of a commodity.
It refers to the capacity of demandeither to stretch or shrink to a given change in price.
Elasticity is an index of reaction.
Elasticity of demand indicates a ratio of relative changes in two quantities.ie, price anddemand.According to professor Boulding:
“Elasticity of demand measures the responsivenessof demand to changes in price”.
In the words of Marshall,”
The elasticity (or responsiveness) of demand in a marketis great or small according to as the amount demanded much or little for a givenfall in price, and diminishes much or little for a given rise in price
Different Degree of Price Elasticity of Demand
Perfectly Elastic Demand:
In this case, a very small change in price leads to an infinitechange in demand. The demand curve is a horizontal line and parallel to OX axis. Thenumerical coefficient of perfectly elastic demand is infinity (ED=infinity)
Perfectly Inelastic Demand :
In this case, whatever may be the change in price,quantity demanded will remain perfectly constant. The demand curve is a vertical straight lineand parallel to OY axis. Quantity demanded would be 10 units, irrespective of price changesfrom Rs. 10.00 to Rs. 2.00. Hence, the numerical coefficient of perfectly inelastic demand iszero. ED = 0
Relative Elastic Demand:
In this case, a slight change in price leads to more thanproportionate change in demand. One can notice here that a change in demand is more thanthat of change in price. Hence, the elasticity is greater than one. For e.g., price falls by 3 %and demand rises by 9 %. Hence, the numerical coefficient of demand is greater than one.

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