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ECONOMICS

TOPIC:

ELASTICITY OF DEMAND

PRESENTED BY:

HAMZA , UMAR , MOAZEM SAGHIR

DEMAND

Demand refers to the quantity of goods that potential

purchasers would buy or attempt to buy while having

buying or purchasing power.

DEMAND SCHEDULE

It represents the amount of a good that buyers are

willing and able to purchase at various prices, assuming

all other non-price factors remain the same. The

demand curve is almost always represented as

downwards-sloping, meaning that as price decreases,

consumers will buy more of the good.

The main determinants of individual demand are the

price of the good, level of income, personal tastes, the

price of substitute goods, and the price of

complementary goods.

The shape of the aggregate demand curve can be

convex or concave, possibly depending on income

distribution.

DEMAND CURVE

The demand curve can be defined as the graph

depicting the relationship between the price of a

certain commodity, and the amount of it that

consumers are willing and able to purchase at that

given price (demand).

Demand curves are used to estimate behaviors in a

competitive markets, and is often combined with

supply curves, often to estimate the equilibrium price

(The price at which all sellers are able to find a

willing buyer, also known as equilibrium price and

market clearing price) and the equilibrium quantity

(the amount that good or service that will be

produced and bought without surplus/excess supply

or shortage/excess demand) of that market. Please

see the article on Supply and Demand for more

details on how this is done.

This negative slope is often referred to as the "law of

demand," which means that when all things but price

are held equal, if the price of the good/service

increases, the less of that good/service will be

purchased by consumers.

CHANGES IN MARKET

EQUILIBRIUM

Practical uses of demand analysis often

center on the different variables that

change equilibrium price and quantity,

represented as shifts in the respective

curves.

DEMAND CURVE SHIFTS

given price is be referred to as an increase in

demand. Increased demand can be

represented on the graph as the curve being

shifted right, because at each price point, a

greater quantity is demanded, as from the

initial curve D1 to the new curve D2. An

example of this would be more people

suddenly wanting more coffee. In the diagram, An out- or right- shift

in demand changes

this raises the equilibrium price from P1 to the the equilibrium price

higher P2. This raises the equilibrium quantity and quantity

from Q1 to the higher Q2. In standard usage,

a movement along a given demand curve can

be described as a "change in the quantity

demanded" to distinguish it from a "change in

demand," that is, a shift of the curve. In the

example above, there has been an increase in

demand which has caused an in increase in

( (equilbrium) quantity. The increase in

demand could also come from changing

tastes, incomes, product information,

fashions, and so forth.

Conversely, if the demand

decreases, the opposite happens:

a leftward shift of the curve. If the

demand starts at D2 and then

decreases to D1, the price will

decrease and the quantity will

decrease. Notice that this is purely An out- or right- shift

in demand changes

an effect of demand changing. The the equilibrium price

and quantity

quantity supplied at each price is

the same as before the demand

shift (at both Q1 and Q2). The

reason that the equilibrium

quantity and price are different is

the demand is different. At each

point a greater amount is

demanded (when there is a shift

ELASTICITY

elasticity is the ratio of the proportional

change in one variable with respect to

proportional change in another variable. Price

elasticity, for example, is the sensitivity of

quantity demanded or supplied to changes in

prices. Elasticity is usually expressed as a

negative number but shown as a positive

percent value

MATHEMATICAL

DEFINITION

mathematical notion of point elasticity. For example, it applies

to price elasticity of demand in which case the functions of

the interest are Qd(P) and Qs(P).

In general, the "y-elasticity of x" is:

respect to y".

It is typical to represent elasticity as 'E', 'e' or lowercase

epsilon, 'ε'.

Examples

the origin.

This is a special case which illustrates that slope

and elasticity are different. In the above example

the slope of S1 is clearly different from the slope

of S2, but since the rate of change of P relative to

Q is always proportionate, both S1 and S2 are unit

elastic (i.e. E = 1).

(Keeping in mind the example of price elasticity of

demand, these figures show x = Q horizontal and

y = P vertical).

.inelasticity.

EXAMPLE

(D1) is perfectly (D2) is perfectly

("infinitely") elastic. inelastic

PRICE ELASTICITY OF

DEMAND

The price elasticity of demand (PED) is an elasticity that

measures the nature and degree of the relationship

between changes in quantity demanded of a good and

changes in its price.

When the price of a good falls, the quantity consumers

demand of the good typically rises--if it costs less,

consumers buy more. Price elasticity of demand

measures the responsiveness of a change in quantity

demanded for a good or service to a change in price.

When the PED of a good is greater than one in absolute

value, the demand is said to be elastic; it is highly

responsive to changes in price. Demands with an

elasticity less than one in absolute value are inelastic;

the demand is weakly responsive to price changes.

MATHEMATICAL

DEFINITION

coefficient of price elasticity of demand

is

or alternatively:

where:

P = price

Q = quantity

Qd = original quantity

Pd = original price

ΔQd = Qdnew - Qdold

ΔPd = Pdnew - Pdold

CROSS ELASTICITY OF

DEMAND

cross elasticity of demand and cross price

elasticity of demand measures the

responsiveness of the quantity demand of a

good to a change in the price of another good.

It is measured as the percentage change in

quantity demanded for the first good that

occurs in response to a percentage change in

price of the second good. For example, if, in

response to a 10% increase in the price of fuel,

the quantity of new cars that are fuel

inefficient demanded decreased by 20%, the

cross elasticity of demand would be -20%/10%

= -2.

The formula used to calculate the coefficient cross elasticity of demand is

OR

fuel consumption), are complements - that is, one is used with

the other. In these cases the cross elasticity of demand will be

negative. In the case of perfect complements, the cross

elasticity of demand is infinitely negative.

COMPLEMENTRY

GOODS

A complement or complementary good is

defined in economics as a good that should be

consumed with another good; its cross

elasticity of demand is negative. This means

that, if goods A and B were complements,

more of good A being bought would result in

more of good B also being bought. An example

of complement goods is hamburgers and

hamburger buns. If the price of hamburgers

falls, more hamburger buns would be sold

because the two are usually used together.

HISTORY

The phrase "supply and demand" was first used by James Denham-

Steuart in his Inquiry into the Principles of Political Economy, published

in 1767. Adam Smith used the phrase in his 1776 book The Wealth of

Nations, and David Ricardo titled one chapter of his 1817 work

Principles of Political Economy and Taxation "On the Influence of

Demand and Supply on Price".

In The Wealth of Nations, Smith generally assumed that the supply

price was fixed but that its "merit" (value) would decrease as its

"scarcity" increased, in effect what was later called the law of demand.

Ricardo, in Principles of Political Economy and Taxation, more

rigorously laid down the idea of the assumptions that were used to

build his ideas of supply and demand. Antoine Augustin Cournot first

developed a mathematical model of supply and demand in his 1838

Researches on the Mathematical Principles of the Theory of Wealth.

During the late 19th century the marginalist school of thought

emerged. This field mainly was started by Stanley Jevons, Carl Menger,

and Léon Walras. The key idea was that the price was set by the most

expensive price, that is, the price at the margin. This was a substantial

change from Adam Smith's thoughts on determining the supply price.

The model was further developed and popularized by Alfred Marshall

in the 1890 textbook Principles of Economics.Along with Léon Walras,

Marshall looked at the equilibrium point where the two curves crossed.

They also began looking at the effect of markets on each other. Since

the late 19th century, the theory of supply and demand has mainly

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