ECO400-BE

Semester: Spring
Assignment No. 1

Hafiz M Rashid Saeed

Reg.No :CIIT/SP15-EMBA-004/CVC
Program : EMBA
Mail :sp15emba004@vcomsats.edu.pk
Cell No. 03006751381

Q No.1
If a demand curve is elastic, total revenue falls when the price rises discuss it in detail.

Ans:
Price Elasticity of Demand:
Price Elasticity of Demand means that there is a relationship between price and
quantity demanded and both they are inversely related. Moreover, we also say that it is a
measure of the responsiveness of quantity demanded to change in price.

Formula for Calculating Price Elasticity of Demand:

Percentage Change in Quantity Demanded
Price Elasticity of Demand =
Percentage Change in Price
{(Q2 - Q1) / Q1} *100
=
{(P2 - P1) / P1} *100

Example:
If a price of Pizza changes from Rs.20 to Rs.22 and quantity of demand falls from
100 to 50 then elasticity of demand is calculated as
{(100-50)/100} *100
PED =

50 %
= -5 = 5 = 5

=
{(20-22)/20} *100

-10 %

Price
B
P2

Rs.22

P1

Rs.20

.
0

50
Q2

100
Q1

Quantity of Demand

Total Revenue:
It means the total amount which collect sellers from buyers as the price of
their sold goods.

Total Revenue = Price * Quantity

The Relationship of Elastic Demand and Total Revenue:

We can discus this relation by knowing their effect on each other. After
seeing the specific impact, we learned that if demand is elastic, the percentage change in
quantity demanded is greater than the percentage change in price. We observe that, if the
price of Pizza rises, its quantity demanded also falls that has a direct effect on its total
revenue.
Now we can say that in an Elastic Demand situation, the change in Price may cause the
change in quantity demanded, total sale, and total revenue.
Thus it is true that, if demand is elastic, total revenue falls because of increasing the
price.

If
ED: P

(Price Falls)

TR

(Total Revenue Rises)

But When
ED: P

(Price Rises)

TR

(Total Revenue Falls)

Graphical illustration of Elasticity of Demand

and Total Revenue:
Here in the graph, we can see tow points A and B. Demand is elastic
between these two points. When the price Rs.20 is less than Rs.22, the quantity demanded
is 100 pizzas which is greater than 50 pizzas. It results in to increase in total revenue.
As

Total Revenue =Price * Quantity = 20 * 100 = Rs. 2000

Thus, in elastic demand total revenue increases when price

decreases because of the increase in quantity demanded .
But
When in the same elastic demand situation, the price rises from Rs.20 to Rs.22,
the quantity demanded reaches from 100 pizzas to 50 pizzas. This thing not only affects
on quantity demanded but also also disturbs or changes the amount of total revenue that
decreases as well.

Total Revenue =Price * Quantity = 22 * 50 = Rs. 1100

Thus, it is proved that in elastic demand, total revenue falls when

price rises because of the decrease in quantity demanded.
Price
B
P2

Rs.22

P1

Rs.20

A
TR of OP2BQ2
= 22*50
= Rs.1100

TR of OP1AQ1
= 20*100
= Rs.2000

.
0
O

50
Q2

100
Q1

Quantity of Demand

Q No.2 :
In most markets, supply is more elastic in the long run than in the short
run, why?

Ans:

Price Elasticity of Supply:

It shows that there is positive relationship between price and quantity
supplied. Moreover, we also say that it is a measure of the responsiveness of quantity
supplied to change in price.

Formula for Calculating Price Elasticity of Supply:

Percentage Change in Quantity Supplied
Price Elasticity of Supply =
Percentage Change in Price
{(S2 - S1) / S1} *100
=
{(P2 - P1) / P1} *100

Long Run Supply:

A time period in which all factors of production and costs are variable.
In the long run, firms are able to adjust all costs.

Short Run Supply:

It means that within a certain future period of time, at least one input
is fixed while others are variable. The short run is not a definite period of time, but rather
varies based on the length of the firm's contracts.

The Cause of Elasticity of Supply is More in

The Long Run Than in The Short Run:
In short run, firms use their full sources and facilities for improving
their capacities, pay extra wages to workers for making overtime work or hire additional
labor to increase their output.
On the other hand, only in long run, firms can build new factories or close the existing
ones or some can enter and others can exit. That is why in the long run, firms can be able
to change their output much more in the long run.
It shows that in elasticity of supply, time also has a significance because during a shorter
period of time, it would be more costly for seller to bring forth and release products.
For example, farmers may be motivated to grow more wheat because of higher wheat
price in the market and there big changes can not take place until the next growing season
starts. Soon after the harvest season, the wheat supply will relatively be inelastic but after
this, during a longer time period that extends to the next growing period or season, the
supply will be much more elastic.

Thus we can say that supply will be more elastic in the long run
than in the short run.
As shown in the graph

QSR
Price
QLR
P2
P1

.
0

Q1

QSR

QLR

Quantity of Supply