Lecture 7
Lecture 7
Microeconomics
Class BBA 3rd Semester
Instructure
Dr. Haidar Farooqe
[email protected]
Lecture# 7
Perfectly Perfectly
elastic inelastic
Unitary elastic demand
The change in price is relatively the same as the change in quantity demanded.
The percentage change in price is equal to the percentage change in quantity
Mathematical
Derivation:
Figure 1.1
P=5 $
Q=50 U
Price $
P/Po*100
5/10*100
= 50%...........(1.2) 15
Q/Qo*100
50/100*100 10
= 50%.........(1.3)
% P=% Q D
PED= % Q/ % P……(1.4)
50/50= 1
50 100 Quantity
It means that if the PED=1
Demanded
Then it will be the UED
Elastic Demand
A change in price leads to a greater percentage change in quantity demand.
Mathematical Price sensitiveness/ many substitutes
Examples: Construction materials, car, Luxury goods, clothes, Pizza, books
Derivation:
P=5 $
Price $ Figure 1.2
Q=70 U
P/Po*100
15
5/10*100
= 50% 10
Q/Qo*100
70/100*100 D
= 70%
50% 70%
% P % Q 30 100 Quantity
PED= % Q/ % P Demand
70/50= 1.4
PED 1
Inelastic demand
A change in price leads to a smaller percentage change in Quantity demand
Mathematical
Examples: petroleum products, food items
Derivation:
P=5 $ Figure 1.3
Price $
Q=50 U
P/Po*100 15
5/10*100
= 50% 10
Q/Qo*100
25/100*100
= 25% D
50% 25%
% P % Q 75 100 Quantity
PED= % Q/ % P Demand
25/50= 0.5
Perfectly inelastic demand
where a change in price has no effect on the quantity demanded.
Completely insensitive to price/No substitute
Example: Life saving drugs, cigarette, electricity
Price $
% P Figure 1.5
% Q 15
PED = 0
10
100 Quantity
Demand
Perfectly elastic demand
where all that is produced is sold at a given price.
Completely sensitive to price/infinite substitutes/A firm cannot change the price
Examples: Milk, subsidies goods
P may make($)
the Q
demand zero
10 D
or infinite
PED =
50 100
Quantity
Demanded
Factors affecting price elasticity of
demand
The range and attractiveness of substitutes
Time
Share in total expenditures
Nature of commodity (necessity or luxury)
Number of users
Habit of consumer
Price range (low, high and medium)(salt, gold, clothes)
Income elasticity of demand
• A numerical measure of the responsiveness of the quantity demanded following
a change in income.
Normally quantity demand increases due to increase in income (normal goods)
But it may not be positive at all the time
Negative relationship with inferior goods