This document contains an assignment submission for a Principles of Microeconomics course. It addresses three questions: 1. It defines price elasticity of demand and explains that price elasticity varies from 0 to infinity on a straight-line demand curve. 2. It distinguishes between binding and non-binding price floors, explaining that a binding price floor is above the equilibrium price and results in surplus supply, while a non-binding price floor is below the equilibrium price and does not impact the market. 3. It provides a table calculating total fixed cost, total variable cost, average fixed cost, average variable cost, average cost, and marginal cost at different output levels. Formulas for calculating each metric are

1. Assignment for
PRINCIPLES OF MICRO ECONOMICS
Submitted by
Ishmeet Kaur Sodhi
Section: D
BCP/19/173

2. 1. What is the elasticity of demand? Prove That price elasticity of demand
varies from zero to infinity on a straight-line demand curve.
Elasticity is a measure of the responsiveness of quantity demanded or quantity supplied to a change
in one of its determinants.
Elasticity of Demand is the measure of change in quantity demanded of a product in response to a
change in any of the market variables, like price, income etc. It measures the shift in demand when
other economic factors change.
The demand for a commodity is affected by different economic variables:
1. Price of the commodity
2. Price of related commodities
3. Income level of consumers
Elasticity of demand is an important variation on the concept of demand. Demand can be classified
as elastic, inelastic or unitary. An elastic demand is one in which the change in quantity demanded
due to a change in price is large. An inelastic demand is one in which the change in quantity
demanded due to a change in price is small.
Price elasticity of demand is a measurement of the change in consumption of a product in relation to
a change in its price. Price elasticity of demand can be expressed in terms of numerical value, which
ranges from 0 to infinity.
Computing the price elasticity of demand.
Price Elasticity = % change in quantity demanded
of demand
% change in price.
For example. The price of a Book increases by 10%, which causes the sale of books to fall by 20%
Price Elasticity = 20 %
of demand
10 %
= 2
Price elasticity 2 shows that change in quantity demanded is proportionally twice as large as change
in the price

3. Types of Demand Curves:
(a) Perfectly Inelastic Demand (Elasticity equals 0)
A perfectly inelastic demand is the one in which there is no change measured against a price
change. When a change in price doesn't affect the quantity demanded of the commodity then it is
termed as perfectly inelastic demand. Here, the demand curve for a perfectly inelastic demand is a
vertical line i.e. the slope of the curve is zero.
Example
(b) Inelastic Demand (Less than 1)
When the percentage change in quantity demanded is less than the percentage change in price then
it's termed as Inelastic demand. i.e Percentage change in quantity demanded < Percentage change
in price.
Price in Rs. Demand in units
20 100
30 100
40 100
P1
P
P2
Q
O
DD
Y
X
O 90 100
Rs 5
Rs 4
Quantity
Y
X
Price
A 22% increase in
price
Leads to 11% decrease in
quantity demanded
Demand

4. (c) Unit Elastic Demand (elasticity = 1)
When the percentage change in quantity demanded is equal to the percentage change in price then it
is called unit elastic demand.
Percentage change in quantity demanded = Percentage change in price
(d) Elastic Demand (elasticity is greater than 1)
When percentage change in quantity demanded is more than percentage change in price then it is
termed as elastic demand.
O 80 100
Rs 5
Rs 4
Y
Quantity
X
Price
A 22% increase in
price
Leads to 22% decrease in
quantity demanded
Demand
O 50 100
Rs 5
Rs 4
Quantity
Y
X
Price
A 22% increase in
price
Leads to 50% decrease in
quantity demanded
Demand

5. 8
(e) Perfectly Elastic Demand (elasticity = )
When there is a change in quantity demanded without any corresponding change in price then it is
termed as perfectly elastic demand
O
Rs 4
Quantity
Y
X
Price
At any price above Rs 4 quantity
demanded is 0
At exactly Rs 4 consumers
will have any quantity
Demand
At price below Rs 4
quantity demanded in
infinite.

6. PF
Equilibrium
Price P*
Y Surplus
Price
Price Floor
X
QD
Quantity
QS
Demand Curve
2. Binding and Non-Binding Price Floor
A price floor is an establishment of a lower boundary on the price of commodities in the market.
Governments usually set a price floor in order to ensure that the market price of a commodity does
not fall below a level that would threaten the financial existence of producers of the commodity.
Types of Price Floors
1. Binding Price Floor
A binding price floor is one that is greater than the equilibrium market price.
The equilibrium market price is P* and the equilibrium market quantity is Q* . At the price P*, the
consumer's demand for the commodity equals the producer's supply of the commodity. The
government establishes a price floor of PF, therefore price in the market can't fall below PF
At price PF, Consumer demand is QD (less than Q* due to downward sloping demand curve) And
produces supply is QS (more than Q* due to upward sloping supply curve). After the establishment of
price floor the market does not clear and there is an excess supply of QS – QD
Price Floor
Binding Price Floor Non-Binding Price Floor
O
Supply Curve
Q*

7. PF
Equilibrium
Price P*
O
Y
Price
Producers are better off as a result of the binding price floor if the higher price (higher than
equilibrium price) makes up for the lower quantity sold consumers are always worse off as a result of
a binding price floor because they must pay more for a low quantity.
2. Non-Binding Price Floor
A non-binding price floor is one that is lower than the equilibrium market price. The equilibrium
market prices P* and the equilibrium market quantity is Q*. At the price P*, the consumer's demand
for the commodity equals the producer's supply of the commodity. The government establishes a
price floor of PF.
At price PF consumer demand is QD (more than Q* due to download supply demand curve) and
produces supply is QS (less than Q* due to upward-sloping supply curve)
However, the non-binding price does not affect the market. The market price remains P* and the
quantity demanded and supplied remains Q*. Producers of consumers are not affected by a non-price
floor.
Quantity
QS Q* QD
X
Supply Curve
Demand Curve

8. 3. Calculate TFC, TVC, AFC, AVC, AC, MC
Output Total Cost TFC TVC AFC AVC AC MC
0 10 10 0 0 0 0 0
1 20 10 10 10 10 20 10
2 28 10 18 5 9 14 8
3 34 10 24 3.33 8 11.33 6
4 38 10 28 2.5 7 9.5 4
5 42 10 32 2 6.4 8.4 4
1. TFC = Taking the output 0 value as Total Fixed Cost
2. TVC = Total Cost (TC) – Total Fixed Cost (TFC)
3. Average Fixed Cost (AFC) = Total Fixed Cost (TFC) / Output
4. Average Variable Cost (AVC) = Total Variable Cost (TVC) / Output
5. Average Cost (AC) = Total Cost (TC) / Quantity (Output)
6. Marginal Cost n (MC) = Total Cost n – Total Cost n-1