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0% found this document useful (0 votes)
116 views68 pagesEconomics Book
Uploaded by
Leisha VishwakarmaCopyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF or read online on Scribd
Microeconomics.
eee Schedules
uaa snp © Mat! Sart SUBD SNE
2 i: nereaNe at it and Shift of the Supply e
ie tween Movement :
8.12.1 Meaning of Eau
termination of
3.13 Ghange n Equilibrium Pic a
3.13.1 Change in Demand
3.13.2 Change in Supply
3.14 Laws of Demand and Supply
3.15 Prices in Inflation
+ Points to Remember
+ Review Questions
3.1 CONCEPT OF DEMAND
3.1.1 Definition and Features of Demand
Demand refers to entire relationship between $7) nq refers to the quantity
price and quantity. Demand is the quantity that | 4 the commodity which a
consumers demand at alternative prices during | consumer is willing to buy at a
a given period of time. particular price during a particular
On the other hand, quantity demanded refers to | period of time.
the particular quantity which buyers are willing
and able to buy on a given price during a given
period of time.
Demand for a commodity is defined as the quantity of that commodity which a
consumer is willing to buy ata particular price during a particular period of time.
pe eee 4 consumer demands 2 kg'of wheat in a month at the price of
- 20 per kg. This is a complete example of demand for a commodity as it has \
all the three components of demand—quantity, pri i it
of demand for a commodity are: aires Tiana feta consumers’ optimal choice of the quantity of a pace
i between the consumers’ optimal
good and its price is called the demand function. choice of the quantity of a
_76 understand the influence of factors affecting,
Demand, SUPPIY and Price 33
pemand is a desired quantity. It shows consumer's wish or need to buy the
§ Commodity.
4.1.2 Factors Determining Demand and the Demand Function
is a multivariate relationship, ic. itis
Getermined by many factors simultaneously. | Factors Affecting Demand.
‘of the most important factors determining,
Gemand for a commodity of an individual
household are its own price, prices of other goods,
income, tastes and preferences. Some other miscellaneous factors affecting
‘consumers
demand are income distribution, population growth, government policy, wealth of the
‘change in weather conditions, etc. Individual demand for a commodity
‘consumers,
‘es depending upon the four major variables is expressed symbolically as:
a PRP. PLY, 7,5)
where D,= Demand for commodity X
- Py= Price of commodity X
“i P, = Price of other good Z
Y= Consumers’ income
T= Consumers’ taste and preferences
S= Sociological factors
4 =fPp Pe VTS)
Demand Function = D, = fP)
3.2 LAW OF DEMAND
3.2.1 Definition and Assumptions of the Law of Demand
Definition. There is a definite inverse relationship between the price of the good
and the quantity demanded of that good. Symbolically,
Dy= AP), ceteris paribus
where D,= Quantity
P= Price of the good
Function. The relation between the
|Demand Function. The relation
and its price is called the demand
demand on quantity demanded we use partial
equilibrium analysis, developed by Alfred
Marshall. In this analysis, quantity demanded is made a function of any one factor
affecting demand and the other three factors are assumed to remain constant. For
this the latin phrase Ceteris Paribus, meaning other things being equal, is used.
Keeping other factors constant, the relationship between price and quantity demanded
of a good is called the law of demand. It states that, the consumer’s demand for a
good must be inversely related to the price of that good.
ee principlen vaMICPRCErOMiCs
34
i J
‘Assumptions of the law of emant 4
‘The law is valid only when the followin’ eid
jing the same-
1. The price of the related g00ds remains
2 The income of the consumers remains Ul!
of the consumers
3. Tastes and preferences
4. All the units of the goods are homogeneous
5 Commodity should be @ normal good.
3.2.2 The Demand Schedull and the Demand Curve
of the law of [Demand Schedule
It is a tabular presentation showing |
the different quantities of a good
that buyers of the good are willing
to buy at different prices during a
remain the same.
The tabulation presentation
demand is called the demand schedule.
Table 3.1 shows a hypothetical demand schedule
for wheat.
given period of time.
‘Table 3.1 Demand Schedule for Wheat
Price Quantity Demanded | Reference Point
(Rs. per kg) (kg per month) Fig. 3.1)
20 6 4
30, 5 B
40
4
c
tx 50 3 F
Demand Schedule
It is a tabular presentation ood that rs
showing the diffe
pe sen ferent quantities of
iS rate willing to buy at different prices during a gi a a =
The demand schedule shows an inverse relationship Sees rae
P Price and the quantity
Demand Curve
The graphical rey
g -presentat
function is called a ae 38 teen
la Pi 3.1 demand curve for ain is
a lich shows different quantiti eer
lemanded at different prices in gi thea
month. a
i
Price (Rs. per kg)
35
8 Quantity
(ka per month)
Fig. 3.4 The Demand Curve.
‘The demand curve, d, slopes downward to the right or is negatively sloped. This
law of downward sloping demand has been empirically tested and verified. The
independent variable (price) is measured along the y-axis and dependent variable
(quantity) is measured along the x-axis. The demand curve shows the quantity
demanded by the consumers at each price.
3.2.3 Reasons behind Downward Slope of the Demand Curve
The demand curve obeys the law of demand
which states that there is an inverse
relationship between price and quantity
demanded of a good. The reasons behind
downward slope of the demand curve,
1. Law of Diminishing Marginal Utility:
This law was formulated by Marshall and
it states that as the consumer has more
and more of a good its marginal utility to
him goes on declining. A consumer is not
Reasons behind Downward
Slope of the Demand Curve
of Diminishing Marginal
2. Substitution Effect.
3, Income Effect.
4.New Consumers Creating
Demand.
interested in buying more units ofthe same | Substitution Effect. It is defined
commodity at the same price Instead, he | Sr Quanity
‘6.Numerical example: 6.Numerical example:
Increase in Demand Extension in Demand
Py Oy P, _ &
3 90 3 90
3 100 Z 100
‘Table 3.7 Difference between Decrease in Demand and Contraction of Demand
Decrease in Demand
Contraction of Demand
1. It refers to shift of a demand
curve.
2 In this, there is a leftward shift .
the demand curve.
3 It is due to:
(@ fall in consumer’s income
(© fall in the price of substitute
goods
(0 rise in the price of complem-
entary goods
(@) unfavourable changes in con-
sumer’s taste for this good.
4.It is defined as fall in demand at
the same price of the commodity.
5. Graphical representation:
1. It refers to movement along 2 demand|
curve.
2. Inthis the consumer moves upward on|
the same demand curve.
3. It is due to rise in the price of the
commodity.
A. It is defined as fall in demand due to|
rise in price of the commodity,
5, Graphical representation:
zee \
i
3.8.4 Defir pam, spp mean the amount offered for sa,
According prof. Bena hom. mine supply of £0045 i the quan ia
sording 101" at a given time at various prices.” ity of
antity of the commodity Which is a
of e particular time. ictual}
mn
following elements:
ime.” Ace
crime an
supply of 60m Larne
Sure at 2 Ne Pee Age the
rn i complete WS it has yeleme
1 ‘oven of a commodity that the producer 1s willing to offer for sq)
sale;
2. Price of the commodity and
tity is of
3. Time during which the quat
A supplies 50 kg of wheat
at the pric.
ffered for sale.
Example: A supply statement Is: firm
Rs. 40 per kg in a month.
3.8.2 Difference Between Suppl}
Stock ‘of a commodity is the total quantity that is available in a market
tne Spy tpt Fie ee reaty to sell a
price during a certain time. Thus, supply is that part ell at a cena,
Spee nee Bc are, y ‘part of stock which is actuay
For
ee eal as produced 400 penis. This is the stock of
il, 12 1g to offer fe 3 of pe
Bel, 120 pencils at Rs. 2 each; 150 ee pencils at the rate of Re ps
is 400 pencils, but the supply of pencil Rs. 3 each and so on. In this ca.
ee
ferent prices
3.8.3 Supply Function
ly and Stock
‘
Mie, Demand, Supply and Price e
"Seco Pe Pes tr mv iy a
ae lower price, less quantity of the commodity
1. |S # direct relationship between price and quantity
supplied as shown by law of supply.
2. Price of Related Good (Z) : Supply of a commodity depends upon the price
of its related goods, specially substitute goods. If the price of a commodity
remains constant and the price of its substitute good Z increase, the producers
would prefer to produce substitute good Z. As a result, the supply of commodity
X will decrease and that of substitute good Z will increase. This will shift the
supply curve of good ¥ leftward. Thus, an increase in the price of substitute
good will lead to decrease in supply curve of the other good and vice versa.
3. State of Technology : If there is a change in the technique of production
leading to a fall in the cost of production, supply of commodity will increase.
Example. New photostating technique, printing technique, computerised
calculations, etc. Such advancement will lower the Marginal Cost (MC) at each
level of output, when MC values are plotted, the new MC curve lies below the
old MC curve. Rising portion of MC curve is the supply curve. Thus, with
technological advancement supply curve shifts to the right (that is supply will
increase).
4. Cost of Production : A change in the cost of production, i., prices of factors
of production also affects the supply of a commodity. If wages of labour of
price of raw materials increase, then MC of production will rise. As a result,
supply of the good will fall because producers would prefer to produce some
other commodities that can be produced at a lower cost.
An increase in input price or cost will shift the supply curve to the left
(decrease in supply) and vice versa.
5. Government Policy : Government’s policy also affects the supply of a
commodity. If heavy excise taxes are imposed on a commodity, it will discourage
producers and as a result, its supply will decrease. It is because excise duty
is levied on the total production cost of a firm. An increase in excise duty will
raise firm’s total variable cost, which will raise MC curve. MC curve will shift
to the left. Thus, supply curve will also shift to the left.
Thus, an increase in excise tax will shift the supply curve to the left and vice
‘versa.
IE LAW OF SUPPLY
9.1 Definition and Assumptions of the Law of Supply
Definition
Law of supply derives the relationship between price and quantity supplied.
According to the law of supply, other things remaining the same, quantity
Supplied of a commodity is directly related to the price of the commodity. \n
you
Show
show
8S, in
age mle
320 when price of a
ining the 82 of @ comma,
cxher things emai when its price falls, quantity supplieg
sane expressed 85:
sty i,
also ft
assumptions Of | 1 ban on 8 assumption that all factors, other than the
The law otal ibe ce sup en the same, i.c.,
ofthe comme ed goods remains the SAC
Price
1, Price of relate
2 State of technology i the same.
‘ost of production remains the same.
4. Government policy remains the same.
3.9.2 The Supply Schedule and the Supply Curve
Supply schedule is a tabular statement that gives tel law of supply, Le,
ied of a commodliy at diferent prices per unit of tin,
different quantity suppl iy at
‘A hypothetical supply schedule of wheat is given in Table 3.8.
Table 3.8 Supply Schedule of Wheat
Price (Rs. per Kg) | Quantity Supplied | Reference Point
(Kg per Month) (Fig 3.9)
1 3 Fi
E 8 3
a 2 c
Ti
Be ped ae mer the law of supply, ie., as price of wheat rise:
eae Sania ral peione the relationship benvee
relationship between the pri eee
=z eae aha positive or direc
resionhip bermeen quantity supplied of the ity. With i
Price, the curve rises upward from left to the right as ake a 7
ig. 3.10.
s
Principles of Microeca,, Ses:
0
Demand, Su
where
SS is the \
3.9.3 Re
‘The reas
1. Law
of val
cost
so a
2. Goa
aim
ine
3.10
3.40
Ani
an i
ua
vei
the
si
st pemand, Supply and Price 324
where
‘55 is the upward sloping supply curve obeying the law of supply”
3.9.3 Reasons Behind Upward Sloping Supply Curve
‘The reasons behind an upward sloping supply curve are:
1s more units
1. Law of diminishing marginal productivity: The law states that a
df variable factor are employed, the addition made to total production falls,
ost of production rises. Thus, more quantity is supplied only at higher prices
0 as to cover the rise in cost of production.
2 Goal of profit maximization: The aim of producers is to
aim can be achieved by raising price of the goods. At higher price
increase supply of goods.
3.40 FROM INDIVIDUAL SUPPLY TO MARKET SUPPLY
maximise profits. The
producers
truction of Individual and market Supply Schedules
ies different quantities offered for sale by
‘an individual firm at different prices. A marker supply schedule reflects total
quantities of the commodity offered for sale by alll the individual firms at different
Froes in a particular time period, Thus, market supply is obtained Py aerseatins
the supplies of all firms selling that commodity at altemative prices.
Suppose, there are only two firms A and B in the market for wheat Individual
supply schedules and the resultant market supply schedule is given in Table 3.9.
‘Table 3.9 Construction of Market Supply Schedule
3.10.1 Cons’
An individual supply schedule indicat
Price Individual Supply Scheduiles | Market Supply Schedule
(Rs per Kg) (Kg per month) A+B
Firm A Firm B (Kg per month)
3 12 B 3
#4 8 6 i 4
6 3 u
3.10.2 Construction of Individual and Market Supply Curves
Supply curve is a graphical representation of a supply schedule. Individual
supply curve reflects an individual supply ‘schedule and market supply curve
represents a market supply schedule, Market supply curve is obtained by horizontal
‘summation of all individual supply curves as shown in Fig. 3.11.
Inthe figure, quantity supplied is taken onthe x-axis and price at which commodity
is supplied on-the y-axis. S, and S, are individual supply curves. SS is the market
supply curve which is obtained by horizontally aggregating S, and S, at each level
of price.
ny, you
‘show
show
th
“d
“
¢
@
©
©
S
&
e
"
v sonomics—)
3.22 principles of Microee
Pr Market supply
a
2§
3
4
Ac
a
o 1 14 25 Supply ‘
Oo 6 8 12 Supy o 8 6 %% eo ve «
Fig. 3.11 Construction of Market SuPPIY Cu 1
2
PLY CURVE a
L
3.11. MOVEMENT versus SHIFT OF SU
yh
3.14.1 Movement: Expansion or Construction of Supp! — j
A movement atong the supply cuirve t caused by CRANES in the im e of ‘ e
‘g00d, other things remain constant. It is also called change in quantity supplied
of the commodity. In a movement, no new supply curve in drawn.
Movement can be of two types:
1. Expansion on increase in quantity supplied
2 Contraction or decrease in quantity supplied i 4
Expansion or increase in quantity supplied refers to rise in supply due to rise in
price of the good. Contraction or decrease in quantity supplied refers to fall in
supply due to fall in price of the good.
Movement along a supply curve is graphically shown in Fig, 3.12. Point A on the
supply curve, S, is the original situation.
Fig. 3.12 Movement along Supply Curve
es 3
fi pe aoe fon. Point ig fe @ point such as C shows expansion or more
P -. A downward movement from poit it
Point B shows contraction or less Supply at a lesser aS ae poshensas*
3.11.2 Shift: Increase or Decrease in Supply
A shift in supply curve is caused
the good. These factors are,” NAMB M factors other than ihe price of
1, Price of other commodities v
Demand, Supply and Price 3.23
atte y
2, State of technology tang, Re econon
Sh ee Bn conn
‘4. Government policy, Iya shows
{A change in any of these factors causes shif in the supply curve. It is also called OF Price
change in supply. In shift, a new supply curve is drawn. A shift of the supply
curve can bring about:
1. Increase in supply, or S the
2. Decrease in supply Sex Mert wi
‘ terme 24 sett
1. Increase in supply: When supply of a commodity rises due to favourable ™S markep NET
and
changes in factors other than price of the commodity, it is called increase
in supply. Favourable changes imply:
(@ Improvement in technique of production ten the by
: ‘Bag ee buy.
(6) Fall in the price of substitute goods rou}
© Fall in the cost of production ‘Sthe ma,
(@ Favourable changes in government policy. TEE Meer
Increase in supply is graphically shown in Fig. 3.13 where quantity supplied is ‘ker
measured on the x-axis and price of the commodity on the y-axis. any one
p, bong
oot
ty
ely
3
Pp me
=
° x xX ‘Supply
Fig. 3.43 Shift in Supply Curve: Increase in Supply
‘55s the original supply eurve. An increase in supply is shown by rightward shit
of the supply curve from SS to 5,5, , An increase in supply shows that:
@ either at the original price of OP, more units (XX,) of the good are supplied.
In the original situation OX units were supplied,
(©) or same units (OX) are supplied at a lower price of OP.
* 2 Decrease in Supply: When supply of a commodity falls due to unfavourable
changes in factors other than its price, itis called decrease in supply. The
causes of decrease in supply are:
(@ Obsolete technique of production
(Increase in the price of substitute goods
crease in the cost of production
Infavourable changes in government policy. Principles OF Mietoecongm,
og,
lied at a higher price oF less g
ie is supply is shown graphically jn
ice.
324
3 Mant
Fig3,) on
vase means
we
snp ote same Pe"
x ‘Supply
Fig. 3.14 Shiftin Supply Curve: Decrease in Supply
ae in supply is shown
is the original supply curve, A decrease in supp!
ey Sheer eo ae from SS to S,S, . A decrease in supply shows th.
1, either at the original price of OP, lesser units (XX,) of the good are suppiie;
“Th the oxiginal situation, OX ails, were supplied.
2 or same units OX are supplied at a higher price of OP,.
The difference in the causes of increase and decrease in the supply is summarise:
in Table 3.10.
Table 3.10 Difference in the Causes of Shift in the Supply
Tnerease in Supply
(Rightward shift of supply)
1. Improvement in techniques of
Decrease in Supply
(Leftward shift of supply)
© 1. Technique of production becoming
Production, obsolete,
> Fall in the price of substimte goods| 2 Rise in the price of substitute goods
3. Fall in cost, 3. Rise in ‘cost.
4. Favourable changes in the 4
Unfavourable changes in the
government policy,
3.11.3 Difference
cae Between Movement and Shift of the Supply
The di z anit
ea Summarised in Tables 3.1] and 3.12,
ible 3,11 Difference Betw tse
Increase
in
Increase in Sy ey
1. Tis shit oF suppty curve,
2. In this there is 4 rightward shi
of the supply cure, it
3. It is due to favourable
in factors like: oe
£0vemment policy, Demand, Supply and Price
(@) improvement in technique of
production
(6) Decrease in cost of produetion
(©) Decrease in price of related goods.
4, It is defined as rise in supply at | 4. It is defined'as the rise in supply at
the same price of the good. higher price of the good.
3. Graphical representation:
t
iy
33
e
iP
AF ih
[>
g
2
“euGif
Table 3.12 Difference Between Decrease in Supply and
: Decrease in Quantity of Supplied
__ Decrease in Supply Decrease in Quantity Supplied
1. It is shift of supply curve. _ |1, It is movement along a supply curve.
2. In this the consumer moves to the left
‘on the same supply curve.
_|3. Itis due to fall in the price of the good.) iies1
326 Principles of Microeconor™
3.12 EQUILIBRIUM PRICE
3.12.1 Meaning of Equilibrium Price Page. tn
change.
Equilibrium literally means a state of balance or rest oF potiien eadeaey Ba
economics, the term equilibrium means the state in which there Te To Te tir
the part of consumers and producers to change. Two factors det
price are—demand and supply. are equal to
Thus, equilibrium price is the price at which demand and supply are eg!
each other. At this price, there is no incentive to change.
3.12.2 Determination of Equilibrium Price
by the equality between demand and supply. At
Equilibrium price is determined
this price,
Quantity Demanded = Quantity Supplied
so
Prof. Marshall compared demand and supply to the two blades eS ae ce
scissors, A moment of reflection will show that itis not blade alone that Sus the
cloth, Both the blades together do it, Similarly it is not demand or supply alone
that determines the price of a commodity. Together, through interaction they
determine the equilibrium price of a commodity.
In the very short period, supply is fixed. Thus, demand is more active in
determining price. In the long-run, supply plays a more active role in
determining price.
‘The process of determination of equilibrium price has to be studied under three
headings:
1. Demand
2. Supply
3. Equilibrium between demand and supply
1, Demand: A commodity is demanded because it has utility and satisfies human
Want, The law of demand states that there is an inverse relationship between
Price and quantity demanded of a commodity. The aim of consumer is to
maximise satisfaction. The maximum price a consumer
a commodity to maximise satisfaction, is equal to ue eae ta he
sera ‘marginal utility of the i
Demand, Supply and Price 327
Equilibrium price will be determined where quantity demanded is equal to quantity
supplied. This is called market price. A demand and supply schedule and curve
will show the determination of equilibrium price.
Table 3.13 Demand-Supply Schedules
Price Demand Supply | Equilibrium
Rvikg) (Kg/month) (Kg/month)
3 3 Excess supply
7 4 Excess supples
6 3 3 Equilibrium
3 + z Excess demand
4 5 1 Excess demand
Px
D
2 Excess Supply
oe
POO NeR
6}---- oD= ss
Excess Demand
s'
feet een a
Demand and Supply
Fig. 3.15 Equilibrium Price
In Table 3.13, quantity demanded and supplied of a commodity at different prices
is shown. Equilibrium price is fixed at Rs. 6 where quantity demanded and the
‘quantity supplied are equal, Le., equal to 3 units. In Fig. 3.15, quantity demanded
and supplied are measured on the x-axis and price on the y-axis. DD is the
negatively sloping demand curve and SS is the positively sloping supply curve.
Both these curves intersect each other at point E which is the unique equilibrium
point and it implies that at price of Rs. 6, demand is of 3 units and supply is also
of 3 units. Thus, equilibrium price is Rs. 6. Ata price higher than equilibrium price,
‘excess supply or surplus takes place. Price will fall till equilibrium price is reached.
On the other hand, at a price lower than the equilibrium price, excess demand or
shortage occurs. Price will rise till equilibrium price is reached.
The occurs due to “Invisible Hand’ which is at play whenever there is imbalance
inthe market. The concept of “Invisible Hand’ was given by Adam Smith, ‘Invisible
Hand’ raises the price in case of excess demand, and lowers the price in case of
excess supply, %
Mlustration. If demand function is given by Q, = $0 ~ 0.5P and supply function
8 0, =_104p, ilibrium pric ,
e + P, find out equilibrium price and quantity.
Delhi Unix. B.A. Prog. Sem I 2011)
,
il atte
and,
"mand,
fanoeh
my an
'S they
ferme
oppecrasasek BE
— 3.28 Principles of Microeconomics-1
Solution :
Equilibrium occurs where:
Q, =2,
50-0.5P = -10+ P
= 1.5P = 60
Equilibrium Price
Quantity is
= 30 units
3.13 CHANGE IN EQUILIBRIUM PRICE AND QUANTITY
Equilibrium price is derived by that point where quantity demanded is mel 4
quantity supplied. Therefore, if either demand changes or supply changes or bot
change, equilibrium price and output will change. The effect of changes in demand
and supply on equilibrium price and output can be studied under the following
situations:
3.13.4 Change in Demand
Changes in demand take place due to (1) Changes in prices of related goods,
(2) Change in income of the consumer. (3) Change in taste, and (4) Change in
sociological factor. Due to shifts in the demand curve, supply curve remaining the
same, there is a change in the equilibrium price and output. Demand may
(a) Increase or (b) Decrease.
(@) Increase in demand: When demand of a commodity increases, while supply
remains constant, equilibrium price will increase. At the same time, quantity
sold and purchased will also increase. This is shown in Fig. 3.16.
In the original situations, the DD and SS curves intersect at poi i
equilibrium price as OP and output as OO. Keon Goiphy eh the
demand increases the demand curve shifts from DD to D,D.. The
equilibrium is established at point E,. The equilibrium price gots lip from OP
to OP, and output from OQ to OQ,. Therefore, when col a shi
‘“pwards or rightwards, equilibrium price and output increases, ‘a
® Decrease in demand: If the demand of a comm
odity decr i
the de A / decreases, while suy
cae Fig ee it, the equilibrium price and Output will fall. This is pret Demand, Supply and Price
3.29
ry
@ Q Demand and Supply
Fig. 3.16 Increase in Demand
°
QQ; Demand and Supply
Fig. 3.17 Decrease in Demand
In the figure, DD is the original demand curve. SS is the original supply curve and
E is the equilibrium point. Decrease in demand is given by leftward shift of DD
curve to D,D,. New demand curve intersects the supply curve at point ,.
Eauilibrium price falls from OP to OP, and output falls from OO to OQ, Therefore,
when demand curve shifts leftwards, both equilibrium price and output falls.
3.13.2 Change in Supply
Like demand, supply of a commodity also changes. Changes in supply occur due
to (1) Changes in the cost of production, (2) Changes is production techniques,
(3) Change in excise tax, (4) Change in price of substitute goods, and (5) Change
in number of firms. Due to changes in these factors, supply curve shifts. It may
(@) Increase, or (b) Decrease.
(@) Increase in supply: If the supply of a commodity increases, while demand
‘Temains constant, equilibrium price will fall. This is shown in Fig. 3.18. In the
figure, quantity demanded and supplied are shown on the x-axis and price of
Commodity on the y-axis. DD is the original demand curve. SS is the original
Supply curve. E is the original equilibrium point. SS increases to S,S, . New
Supply curve cuts demand curve DD at point E,, which is the new equilibrium
Point. At this equilibrium point, price falls from OP to OP, and quantity demanded = Principles of | Microeconomics-|
and supplied rises from OQ to OO,. Thus, if supply increases, while demand
is constant, equilibrium price will decrease and the quantity will increase,
P, ° g
Pp
Pp,
D
° @ Q Demand and
‘Supply
Fig. 3.18. Increase in Supply
(6) Decrease in supply: \f the supply of a commodity decreases, while demand
remains constant, equilibrium price will increase. It is shown in Fig. 3.19. In the
figure, DD is the original demand curve. SS is the original supply curve. E is
the original equilibrium point. Supply decreases to S,S,. New supply curve
cuts the demand curve DD at £,, which is the new equilibrium point. Equilibrium
price has gone up from OP to OP, and the quantity has decreased from OQ
10 00, Thus, if supply decreases, while demand remains constant, equilibrium
price will rise and output will fall.
Pe
ei QQ Demand and
‘Supply
Fig. 3.19 Decrease in Supply
A summary of these change i
ee ge in deman oe
quantity is given in Table 3,14 2 n'4 2nd StpPly on equilibrium price and Demand, Supply and Price
‘Table 3.14 Effect of Changes in Demand and Supply on
Equilibrium: Price and Equilibrium Quantity.
Situations Effect on
Equilibrium
Change in Demand so .
(@) demand increases rises rises
(6) demand decreases falls falls
Change in Supply
(a) supply increases falls rises
(®)supply decreases rises falls
3.14 LAWS OF DEMAND AND SUPPLY
Laws of demand and supply are:
1, Arise in demand for a commodity, raises both the equilibrium price and the
quantity.
2. A fall in demand for a commodity reduces both the equilibrium price and the
quantity.
3. Arise in supply of a commodity, reduces the equilibrium price and raises the
equilibrium quantity.
4. A fall in supply of a commodity, raises the equilibrium price and reduces the
equilibrium quantity.
3.145 PRICES IN INFLATION
Under the ceteris paribus assumption, we assumed all other prices to be constant.
Does this mean that the price theory is inapplicable during an inflationary period
when almost all prices are rising? Answer is no. Price changes in the price theory
are changes relating to the average level of all prices. In an inflationary period,
a rise in the relative price of one product means that its price rises by more than
the rise in the general price level.
A distinction is necessary in the following terms:
(@) Absolute price: \t is price of the product in money term. It is also called money
‘price.
(6) Relative price: It is price of a product expressed in relation to other prices.
(© General price level: It is changes in the product’s owii price relative to
changes in the average of all other prices.
In price theory, whenever we talk of a change in the price of one product,
we mean a chainge in relation to the general price level. 52 principles of Microeconomics-1
5.1 DEFINITION OF PRICE ELASTICITY OF DEMAND
‘The low of demand states tat when the price of a good falls, CORTES demand
more units of the good. But how much more? It is important and useful to have
magnitude of change in quantity demanded to a change in Price It is called price
elasticity of demand.
Price elasticity of demand -measures the
responsiveness of demand of a good to a change in its
price. Alfred Marshall was the first economist to
formulate the concept of price elasticity of demand as
the ratio ofa relative change in quantity demanded to
a relative change in price. A relative measure is needed
so that changes in different measures can be compared.
in demand and price are measured by percentage changes
of units. Numerically, price elasticity of
Price Elasticity of
Demand. It is defined
good to 2 percentage
change in its price
“These relative changes
4Q = Change in i
Oe Oe eee
AP = Change in price (or P, ~ P)
P= Original price
y~ Coefficient of elasticity of demand. ¢, i
is negative. The ratio is
inet ar rice ond anon dosened ort
= sums, the minus sign is dropped
from the numbers and all
positive. percentage changes are treated as nics.)
‘mand
have
Price
the
in its
St to
ad as
ed to
eded
Res:
Ly of
ervice are:
medicines and salt have
demand.
2, Incom'
the price elasticity
nnsticty of Demand and Supply
of necessity is low.
: Higher the cost of the good relative to total income of the
, will be the price elasticity of demand. If the price of bread,
ete.,
‘ntity demanded will fall by a greater proportion showing,
63
5.2 FACTORS AFFECTING PRICE ELASTICITY OF DEMAND
‘The factors which determine the price elasticity of demand for a commodity or
{. Availability of Close Substitute: 4 good having close substitutes will have an
elastic demand and a good with no close substitutes will have an inclestie
demand. Example: commodities such as pen, cold drink, car, ete, have close
ites. When the price of these goods rise, the price of their substitutes
ing constant, there is proportionately greater fallin the quantity demanded
Mpthese goods. Tha is their demand is elastic. Commodities uch ss peeerbed
no close substitutes and hence, have an inelastic
ye of the Consumers: If the income level of consumers is high, the
‘elasticity of demand is less. It is because change in the price will not affect
the quantity demanded by a greater proportion. But in low income groups,
elasticity of demand is high.
3, Luxuries versus Necessities: The price elasticity of demand is likely to be low
for necessities and high for luxuries. A
necessity is a good or service that the
consumer must have such as food
(bread, milk) and medicines. Luxuries are
goods that are enjoyable but not
i le: travelling by ai
fa 5-star hotel. If the price of
; rise, then demand will not
proportion because their
cannot be delayed. That is
Factors Affecting Price Elasticity
of Demand
‘Availability of Close Substiture
Income of the Consumers
Luxuries versus Necessities
Proportion of Total Expenditure
Spent on the Produet
‘Number of Uses of the commodity
5. Time Period
Ree
of demand in
which is relatively low, doubles it would have almost
demanded of them. On the other hand, if price of car
15 sha AT pain Principles of Microeconomics,
5A
i ine period needed to find substitutes of the commodi
6. Time Period. If 1h Mr of demand is less and vice versa. Example: today
fable for petrol. It has an elastic demand. Thay
is more, the pric
there are many substi
is ifits price rises, demand wi
re available and its pri
itutes avail
1),
> 1):
When e, > | and pri
: “0 price (P) falls, quantity demanded (0) i
Coe er nes tn ns es
a case of elastic demand. It exists in Sea pooe |
& S ty of Demand and Supply
jon 2. Equal to One (e, = 1),
= 1 and price falls, quantity dem; i i
an) ty demanded in, i
wen price. Hence, total expenditure (P = ¢) remus tiiengete ta with
fesange mies there i mo change i the expending inna
a (it is difficult to give an example of this situation). a
i yion 3- Less than One (e,, <1), ;
sil i it
a < 1 and price falls, quantity demanded increases in te propor
f i 83 th
the fill in price. Hence, total expenditure falls. That is, Price aad Gapanatd
10 in the same direction. It is a case of inelastic demand. te exists in
are tof inferior goods.
‘The three situations of outlay method are summarised in Table 5.2,
85
‘Table 5.2 Situations: ‘of Outlay Method
Quantity demanded rises
in a greater proportion
Quantity demanded rises
in the same proportion
‘Quantity demanded rises
| in a lesser proportion
:
'z
‘af,
grees Principles of Microeconomics ,
ie gras
5.3.2 Percentage Method or Proportionate Method el
Percentage method is also called proportionate method. According to this methgy es
2, is calculated by the following formula:
Percentage change in quantity demanded
e Percentage change in price
AQ P
or “= APO
‘The absolute value of the coefficient of elasticity of demand ranges from zero 1,
infinity (0
rthere are large change in price and quantity deman
vetoh over the demand curve, then the percentage pacii thai relates to a
st elasticig, defined as the price elasticity of demand betmecn west calc
Jomand curve which are located for firm cach othe, Poms on a
problem arises as the same pair of price and quantity figures ar
‘hich elasticity is measured. To avoid this problem, the price an.
peel ents, the formula for wre elasticiy es
ene
Rte,
4Q 2
eo at 270,
2
AQ (+P)
% AE“) ~ 4P'(0,+0,)
5.3.3 Geometric Method
This method is used to find the point elasticit
illustrated in Fig. 5.8.
of demand. It is graphically
LG, a
m Fig. 5.8 Geometric Method of Finding Point Elasticity
ot clasticty at point R, take point S very close to point R (for clarity
_ from R). Join points R and Sand extend RS to meet x-axis at point B
Janis at point A,
2 oo AP = RT.
TIED) Ag-s/o0)= 75: Principles of Microeconomics,
512
P = OP =RO
Q= 0 ni
substituting in the percentage formula of point elasticity, we get
oe
>> APO
ES ARO
= RT’ 0g ”)
‘Since ARTS and ARQB are similar because each corresponding angle is equay
we have
sed
~ RT RO 0°)
Substituting the value obtained in equation (2) in equation (1), we obtain:
OBE RO.
RO-0O
2,
Os
“= 00
Also, AAPR and AROB are similar. Hence,
QB. PR
RQ AR
Since PR = OO, substituting, we get
2B, | 00
RO AR
QB RB
4 00 ~ “AR
4408 is a right-angled triangle and PR is parallel to OB. Thus,
QB | RB “op
00" AR’ AP
Therefore, to measure elasticity at any point on a non-linear demand curve, ér2
a tangent to the curve at this point meeting the two axes. The value of elasticity
is the ratio between the lower segment to the upper segment on the demand curve
and on the price axis. The value of elasticity on the quantity axis is the ratio
between right-hand side (RHS) segment to the left-hand side (LH ft. Thus,
value of elasticity is then calculated by the formula: peat
giastl
64
Ther
Case
iis
that
aca
Cas
Itis
that
infin
Cas
It is
hype
chat
ont
. By
for =-(1)
qual,
-Q)
are
sticitY
ratio
Thus
resticity of Domand and Supply
¢, (at a point)
— Right hand side segment
Left hand side segment (
54 CONSTANT ELASTICITY OF DEMAND CURVES
fF constar i
here are three cases of constant elasticity of demand curves. These are
case 1. ép is constant at zero.
itigshown in Panel 4 of the Fig. 5.9. The demand curve (d,) is vertical. 1
that whatever be the price, quantity demanded is given atthe level OO, In ocn
a case [ép| is always zero. Demand curve is perfectly inelastic.
Case 2. ¢, is constant at infinity,
Itis shown in Panel B of the figure. The demand curve (d,) is horizontal. It shows
that at a price, quantity demanded can be anything. In such a case, |e, is always
infinity, Demand curve is perfectly elastic.
Case 3. ¢, is constant at one.
Ii is shown in Panel C of the figure. The demand curve (d,) is a rectangular
hyperbola. Itshows that percentage change in price always leads to equal percentage
change in quantity demanded. In such a case, |e,| is equal to one at every point
on the demand curve, The demand curve is unitary elastic.
Panel A: e=0 Panel Be, == Panel C:ey=1
| a
{ 3 % 3g
é a é
Oy
. Quantity 2 Quantity © ‘Quantity
Fig. 5.9 Constant Elasticity Demand Curve
55 ELASTICITY ALONG A LINEAR DEMAND CURVE
: ae ometrie Method, the elasticity of demand is measured by using the
re ee eet orang carve
. ise ~ Upper segment of demand curve
Sl a a dy sai Bt Principles of Microeconomic,
4B is a negatively sloped straight line demand curve joining the two axes ,
Fig. 5.10). Elasticity at different points on demand curve can be calculate a
follows:
2
2
&
Quantity
Fig. 5.10 e, on a Linear Demand Curve
Lower Segment BC E
At Point C = Upper Segment = AC’ As BC < AC, -. &y <1
BD
At mid-point D = 77, as = BD = 4D, Se 1
BE
int E = ——, BE> AE,
At point E = 7, BE > AE,
. 0
At point B= = 2 ey=0
A
At points A = ->
5.6 APPLICATIONS OF ELASTICITY OF DEMAND
Ailicaton 1: Two linear intersecting demand curves have different elasticit
at the price corresponding to point of intersection.
The two straight line intersecting demand curves DD, and D,D, are drawn
Fig. 5.11. Point & is the point of intersection. Extending point R to cut the price
axis at point P, and the quantity axis at point X.
22
APO
@, at point R =
" g :
Since DD, and D,D, are intersecting at point R, then om will be same.
giastic
tno
ute f
Sine
or
papryrtas ‘0,
Mom.
a
°
aXe,
ley. Ge,
Mage
Jasticll
rawn in
ne pric?
me
asticity of Demand and Supply
518,
P
Ratio @ for DD, at point R = a
RX
P
patio g fr DD, at point R= EX
P
er words, the second part of the e,, formula, — can be ;
o formula, Gan be ignored, Comparing
A
ah rs pt 2 of the formula, we get:
TEP 2 for DD, at point R= “¥
Ratio 2 for D,D, at poin(s)- a”
Since LN > LM
LN | LM
EN. EM
iy fda
BO) ea ee
oa ap} ratio of DD, > | Ap) ratio of D,D,
e, of DD, > e, of DD,
Ds, Dy AR
(0,) cD)
Fig. 5.14 Point Elasticity at Price P for Two Intersecting Demand Curves
Application 2: Two parallel Demand Curves have Different Elasticities at a
Given Price,
aFig. 5.12, two straight li DD, is parallel to
.12, two straight line parallel demand curves are drawn, DD,
sce elasticity at a price, say point P, we draw PS parallel to the
ig fe apne ‘the geometric ees we obtain:
seu sie aoud amp uo “q quiod sures ox
woy SuneuISt0 umeup are “Gq pue ‘gq sano Puewiep raul] OMI “E]“¢ “Sty Uy
22d UP8D 0 I puouag fo Syousory sung savy sry aoteg aus
No nmog uns 217 wWo4f SunoupStsg saxam> punnuag sony om) 2¢ wonosyddy
“@'q 30 Auonseye aip wep 2100 st 'gq 30
ase ang gee 10
‘aa > dd.
dO dO
“dd > dd souls
dd _'GS _ 5 ymod ‘g°q 103
do ‘as
f.
aft Nee Mts Cie, es eat
do ‘aw
Bq] ON JO} BU BE ANSE! WIG ZS “B14
ors
PS21woucze011y 40 sejdioulrd ‘psaan aoja pue pucUIOP
HI UO P2tAa] aq pinoys soxei ysiy Sujavy spoos s04
151 aye ayy
02 au Jo papueuiap Anuenb pu aoud ur auey> yoexo Jo uoneuruuaap
Hd 10.98} pue apen jeuonewoqUT “srowLey uoumuiano8
Nedouow 40j rgasn Aion si Kuonseja aud 30 sdzou0o ayy
ONVWA3G JO ALIOLLSW13 S9Iud dO SONVLNOdWI 25
‘Aynuenb
Pav (a'@) usw onseja ssoq st (gg) sano Puewep amp TY s} yNsax ayy
‘aa 309 <‘G'qyo% a
'd <'a6 sous,
yo § autod ye ‘7%q 103 Yo
00 _ A _ y ywod ‘aq 305
‘G6 "ay
SSNun9 PuBWed jolfexed JBOUr] OM| J04 AINUEND LAA ee. ‘Ayonse | Wwiod Shs “Big
‘aa pue ‘a
“Guan u2ary 2 2
2 woppeonddy
UME Miasaffier asvy sanuny puanuog jayoind AOOULT OL £5 HODPID
a9 gs
rau
‘SHO280/011y 40 Sajd}ULe ‘ods:
nS
Das >
ado 69 poi
13 oad =
40} 9AIND PULMOP OU) [TIAL "PUeUIap Jo AyDK
oy) UE Sot] SiKy 40}
“SHOULIE ay) 0} Ats9A0d Buug £]pes9U23
\d Jo xopered ayy :Aiuayd jo xopesed “S
S1 suodxa 405 puewiap jo Auonse|e
}2P apen ssonpau uonen|eAsp “UH
an) op yas Wry ‘tadeayp suodxo sayeUut
ana a
pu
90 Joy
804% 10398} © 02
V Suroud somes up ¢
Ur tat 01983
‘Aids Bue puewed jo Apogee a a al
1*eras . po ” 5.29
le rem is that the same pair of pri
&, i Price and it
ey te ete of elasticity. The value of iaday das figures are giving two
ee is measured. To avoid this problem, the ve tee fitection in
sb > rik it
sie eagd. The formal of ac els of demant in ee)
=H , B+ P,
Arc e, = —— + x AQ p+p,
ee Pearce arias:
dnt
= Spoke
stration 24
¥ ang =
Given two demand schedules, determine their elasticity of demand usi
osmataet ity of using the total
[a 5 4 3 2 1
a 200 210 230 255 300
Qs 200 260, 370 600 1300
Solution.
Calculating total expenditure for good A and good B, we get:
Total Expenditure 2, Total Expenditure
on A on B
1000 200 1000
840 260 1040
690 370 1110
510 600 1200
300 1300 1300
Therefore, good A has inelastic demand (e, < 1) since expenditure falls with fall
in price, Good B has elastic demand (e, > 1) as expenditure rises with fall in price.
58 INCOME ELASTICITY OF DEMAND
5.8.1. Definition of Income Elasticity of Demand
The income elasticity is a quantitative measure of the degree to which quantity
demanded responds to a change in income, ceteris paribus. Income ssticity Bi
demand (hy) is calculated as the percentage change in quantity demand
due to percentage change in income. That is,
% change in quantity demanded
‘ome
a Principles of Mleroeconem,
mee y= Initial income
Q= Initial quantity demanded
AQ= Change in quantity demanded
AY= Change in income
Coefficient of income elasticity of demand
6,
Tncome Elasticity: The income elasticity of demand ulated as the
percentage change in quantity demanded due to percentage change in
income. ps
5.8.2 Types of Income Elasticity of Demand
Income elasticity can be positive or negative. Income elasticity can take five
different values. These are:
I. Greater than One
This occurs when the percentage change in quantity demanded is greater than the
percentage change in income. It is called high income elasticity. It takes place in
case of luxury goods.
2. Equal to One
This occurs when the percentage change in quantity demanded is equal to the
Percentage change in income. It is called unitary income elasticity. It holds for
those normal goods which fall between the category of necessities and luxuries.
3. Less than One
‘This occurs when the percentage change i
ge in quantit i
Percentage change in income, | ee ct soe
in case of necessities, called low income elasticity, This takes place
4. Equal t0 Zero
inferior good,
5. Less than Zero
This occurs when the ‘i
change in income, tt he camte® change in quantt
inferior goods. Mics,
five
1 the
e in
the
for
ies.
the
ace
ae.
a3
4
ust of Demand and Supply 531
ne 59 summarises the five different values of income elasticity.
‘Table 5.9 Different Values of Income Elasticity of Demand
Terminology ‘Type of Good
value of 6
High Income elasticity Luxury good
Unitary income elasticity | Normal good which isa necessity as well
as semi-luxurious
‘Low Income elasticity Necessity
Zero Income elasticity Can be a poor quality necessity
Negative Income elasticity | Inferior Good
5.8.3 Graphical Representation of Income Elasticity
Engel curve named after Ernst Engel
to establish a systematic relationship
odities. Engelcurve is shown
Income elasticity is graphically shown by
(1821-96). Emst Engel used this device
cchold income and expenditure on comm:
between hous:
in Fig, 5.16.
Quantity
Fig. 5.16 Engel's Curve ‘showing e,,
In the figure, 4
‘The range of Engel’s curve between origin till Y,
Between origin and ¥, ~
income level shows that nothing is demanded at income
jess than ¥. So, e, = 0 for income less than Y,-
Between ¥, and Y, = Between incomes of ¥, and ¥,, as income rises quantity
demand rises. It implies e, > 0 and the good is
normal good. A normal good can be a necessity oF #
luxury.
Beyond Y, = Beyond income level ¥,, quantity demanded falls 2
income rises. It shows e, <0 and the good is a”
inferior. a o
s ao
0 Be
ie Principles of Microsconomicy pa” whet
5. ee es
@ ce 00
LASTICITY OF DEMAND 5 Om one &
5.9 CROSS El of Os |
i or oe
5.9.1 Definition of Cross Elasticity of Demand wf, a
a z is a quantitative measure of the eff w
s-elasticity of demand (e,,) is a quantitative measure o fect on the
se fly demanded of good x due to change in price of good 2. That is, :
seat Of the responsiveness of the quantity demanded of x to a perorye ENe-
change inthe price of 2. The cross-elastcty between two goods x and zis calevaey 1
as: 2
% change in quantity demanded of x ‘
% change in price of 2 -
where pel
P, = Initial price of good z 5.10
Initial quantity demanded of good x glasticitY
mmodi
‘OX = Change in quantity demanded of good x os
AP. = Change in price of good z the degre
€,, = Coefficient of cross-elasticity of demand
Cross Elasticity of Demand: It is a measure of the responsiveness of the
quantity demanded of x to a percentage change in the price of z.
5.9.2 Types of Cross Elasticity of Demand
The valus of cross-elasticity ranges from minus infinity to plus infinity.
(<6, < +2). The various values of cross elasticity of demand are:
wher
(@) Greater than Zero (e,, > 0)
This occurs when the two goods x and z are substitutes. The higher the numerical
value of... the greater the degree of substitutability. If e,, = co, then x and z are
perfect substiautes. The positive sign on the e,, explains the positive relationship
between the price of a good and the quantity demanded of its substitute. If the
Price of tea falls then the quantity demanded of its substitute, coffee, will fall.
Thus, cross elasticity between tea and coffee is positive. a
() Less than Zero (e., < 0) re
This occurs when the two goods x and z are complements. The lower the numerical
value of ¢,,, the greater is the degree of complementarity. If e, =-2 then x and
2 are perfect complements. The negative sign on the e,, explains that when the
price of a good increases the quantity demanded of its complements moves in the f
opposite direction. Ifthe price of sugar increases, the quantity demanded of tea
will fall. Thus, cross elasticity between tea and sugar is negative,
EEE ee ronomics.,
ect on the
is, itis
eFcentage
-alculateg
ity.
nd and Supply
yotyoreme 5.33
geet er0 (Ex, 9)
the two goods x and z are
occurs when unrelated. That is, a change in the
‘er one good does not affect the quantity demanded of the other ood
# of cross elasticity of demand is summarised in Table 5.10.
@
Table 5.10 Values of,
ENO. Value of ¢,. Relationship between x and z
e,--2 x and z are perfect complements
x and z are complements
x and z are unrelated
x and z are substitutes
x and z are perfect substitutes
|
5,10 DEFINITION OF PRICE ELASTICITY OF SUPPLY
Elasticity of supply is defined as the responsiveness of quantity supplied ofa
‘commodity 10 change in its own price. The value of elasticity of supply will give
the degree or quantity of change in supply to a change in price.
It is calculated as:
Percentage change in quantity supplied
Percentage change in price
Bg
els
egia
ey ~ Coefficient of price elasticity of supply
P= Initial price of the good
Q = Initial quantity supplied
‘AQ = Change in quantity supplied
‘AP = Change in price
‘The positive sign indicates that price and ‘quantity supplied of a good are positively
related, ie. greater units of the good will be placed in the market only at higher
prices and vice versa.
[soe of Supply: It is defined as the responsiveness of quantity
supplied of a commodity to change in its own price. Principles of Microeconom,
5.34
5.11 FACTORS AFF!
‘The important factors
MA Beene
ECTING PRICE ELASTICITY OF Supp,
ffecting price elasticity piepelyee:
a
factor: The longer the time period, the more elastic is the Supply
1, Time factor:
acne good: Inelastic supply in case of perishable goods becay,
‘Nature of
its supply can neither be increased ea 7 ae Period
Production capacity: If unlimited haces i ie; Production
can be increased easily), then there is el ee supply. Production
capacity exists, then there is inelastic supp! oe b
4, Production methods and techniques: If an industry uses complicate
methods and techniques of production, supply of the commodity produces
by that industry will be relatively inelastic. On the contrary, if an industry
uses simple methods and techniques of production, supply of the commodity
produced by that industry will be relatively elastic.
Stage of laws of return: If the law of diminishing return is applied on the
production of a commodity, elasticity of supply for such a commodity will
be inelastic. On the contrary, if the law of increasing return is applied on
the production of a commodity, supply of such a commodity will be elastic
- Future price expectation: Ifthe producers expect that the price will rise in
future then they will supply Jess quantity in the market Presently. Thus
supply will become inelastic. If the producers expect that the price will fall
in the future, supply will become elastic.
2
5
g
i
é
z
é
lasticity of supply is given in Table 5.11.
Table 5.11 Determinants of Elasticity of Supply
iw ae és is more when...
Nature ofthe goog ~ More time is available
Production capacity ~ Durable goods are available
Production ehigues ~ Unlimited production capacity exi S
Stage of laws Of return ~ Production techniques ‘are simple ‘
Future pric > bay i i
ie nan "| 7 TA Meta seas sprain
Number of prods ting is expected that 2
Produced by an industry ted
try
ity
‘Supply
orbemand and L
f a eASUREMENT OF PRICE ELASTICITY OF SUPP Y
i 0d elasticity of supply:
: two methods of measuring
‘qhere are tw
rcentage Method
ee the formula:
4 by the formu
sary of supply is measures ; :
pee Percentage change in quantity supplied
SS Percentage change in price
dQ P
“yP'O
city of supply. They are summarised in
here are five degrees or types of elasticity of supply:
Table 5.12.
‘Table 5.12 Values of Elasticity of Supply
Coett. of | Types of Description Shape of Supply
¢ e Curve
s 5
i e,=0 | Perfectly | This oocurs when to a percentage | Vertical (SN)
inelastic | change in price there is no
supply | change in quantity supplied.
2. 0
