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Business Economics (ECO 341)
Fall Semester, 2012
Khurrum S. Mughal
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2.
Price Elasticity of Demand
Price Elasticity of Supply
Uses of Elasticities
Theme of the Lecture
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3.
How are price and demand related for a good? (law of
demand)
Consumer Demand Theory Qd= f(Px, I, Py,T)
Assuming everything else fixed…………….
Individual Demand
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Demand function faced by a firm
QD= a0+a1Px +a2I+a3N+a4Py+ a5T……………
“a” is coefficient to be estimated with regression analysis
Demand Faced by A Firm
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Measures responsiveness to changes in quantity demanded due
to changes in price
Percentage change in quantity due to percentage change in price
Different effects of reducing price
Types:
Point Price Elasticity of Demand
Arc Price Elasticity of Demand
Price Elasticity of Demand
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6.
Graphical Representation
Different at different points
Given by coefficient “a” with Price in the regression
equation
Point Price Elasticity of Demand
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Graphical Representation
Used since Point price elasticity differs in scenarios of
price rise and fall
Calculated by average of change in quantity and price
In general: the price elasticity of demand for a firm is
higher than the price elasticity of market demand
Arc Price Elasticity of Demand
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Price Elasticity of Demand
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Quantity Supplied and Demanded
Price
Ed > 1
Ed < 1
Ed = 1
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Polar Extreme Cases of Price Elasticity of Demand
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Quantity Supplied and Demanded
Price
Perfectly
Inelastic
Demand
Perfectly Elastic Demand
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Effect of decrease in price on Total revenue:
Increases if demand is elastic
Remains Unchanged if Unitary elastic
Decreases if Inelastic
Graphical Representation:
Price Elasticity, Total Revenue
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Availability of Substitutes
Example: Sugar vs Salt
Larger for longer time periods
Example: Petrol vs CNG
Factors Effecting Price Elasticity of Demand
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13.
Price Elasticity of Demand
Price Elasticity of Supply
Uses of Elasticities
Theme of the Lecture
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The quantity sellers are willing to sell at a given price level
Depends on:
Price of the commodity
Prices of inputs
Technology
Opportunity cost
Future expectations
Number of sellers
Supply of a Commodity
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The higher the price, greater is the quantity sellers are
willing to sell in the market (law of supply)
Assuming everything else is fixed………
Individual Supply
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Measures responsiveness to changes in quantity supplied due to
changes in price
Percentage change in quantity due to percentage change in price
Factors Effecting elasticity of supply
Ability to increase production
Time Period
Price Elasticity of Supply
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Polar Extreme Cases of Price Elasticity of Supply
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Perfectly
Inelastic
Supply
Perfectly
Elastic
Supply
Quantity Supplied and Demanded
Price
Quantity Supplied and Demanded
Price
Initial Demand
New Demand
Initial Demand
New Demand
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