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PRESENTATION OF

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

 People increasing the quantity demanded at a


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

In economics, the definition of elasticity is based on the


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:

or, in terms of percentage change

The "y-elasticity of x" is also called "the elasticity of x with


respect to y".
It is typical to represent elasticity as 'E', 'e' or lowercase
epsilon, 'ε'.
Examples

Unit elasticity for a supply line passing through


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).

Illustrations of perfect elasticity and perfect


.inelasticity.
EXAMPLE

The demand curve The demand curve


(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

The formula used to calculate the


coefficient of price elasticity of demand
is

Or, using the differential calculus:


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

In the example above, the two goods, fuel and cars(consists of


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