The document explains the concepts of equilibrium, surpluses, and shifts in supply and demand. It defines equilibrium as the price where quantity demanded equals quantity supplied. A surplus occurs when quantity supplied exceeds quantity demanded, resulting in a price above the equilibrium. The effects of changes in supply and demand are shown using diagrams: an increase in demand or supply shifts the curve right, raising the equilibrium price and quantity, while a decrease shifts it left, lowering price and quantity.

1. 1.1. Explain the difference between microeconomics and macroeconomics?
Economics is a subject who talks about distribute, people and consumption .Our want is endless.
But we do not have enough resources .We have to use our limited resources in an efficient way.
That is called efficient situation. Economics traditionally deals with 2 branches:
1) Microeconomics.
2) Macroeconomics
There are some difference between Microeconomics and Macroeconomics:
Microeconomics:
• ‘Micro’ comes from the word ‘micror’ which means small.
• It talks about individual from person
• It is concerned with the behavior of individual markets and households.
• The study of microeconomics mainly deals with demand, supply, elatisity, cost and others.
• Microeconomics deals with the activities of individual units within the economy: firms,
industries, consumers, workers, etc. Because resources are scarce, people have to make
choices. Society has to choose by some means or other what goods and services to
produce, how to produce them and for whom to produce them. Microeconomics studies
these choices.
Macroeconomics:
• ‘Macro’ comes from the word ‘Macror’which means big.
• It views the performance of the economy as a whole.
• The study of macroeconomics talks about monetary & fiscal policy, Gdp,gnp and NNp of a
country as a whole.
• Macroeconomics deals with aggregates such as the overall levels of unemployment,
output, growth and prices in the economy.

2. 1.2. Explain the problems of scarcity and opportunity cost and how these concepts are related, using
numerical examples and/or a production possibility frontier
The central economic problem is scarcity. There is a limited supply of factors of production
(labor, land and capital), but it is impossible to provide everybody with everything they want.
Potential demands exceed potential supplies. This is called the problems of scarcity. Countries
cannot have unlimited amounts of all goods. They are limited by the resources and the
technologies available to them.
Life is full of choices because, of the scarcity of resources. The cost of the forgone alternative is
the opportunity cost of the decision. On the other hand, opportunity cost represents a cost of a
decision which is the value of the good or service forgone.
The scarcity problems and the concept of opportunity cost can be illustrated using the production
possibility frontier.
Production possibility frontier: ppf shows the maximum amount of production that can be
obtained by an economy, given its technological knowledge and quantity of inputs available. The
ppf represents the menu of goods and services available to the society. It shows the tradeoff
between car and truck.
Alternative production possibilities:
Possibilities Car(5) Truck(10)
A 20 0
B 10 5
C 0 10
This data is showing us output which represents One possible combination of output When we
use all our resources. In possibilities A, B, C we can produce 20,10,0 cars and 0, 5, 10.So, car
production is reducing and truck production is increasing. So, this data is showing us Maximum
resources.
F
Y
20
A
15
10
5

3. 1 2 3 4 5 6 7 8 9 10 c x
Production possibility frontier shows us that the vertical line of y represents car and horizontal x
shows number of truck. When the car number is 20 it shows the trade off ratio where ppf shows
the tradeoff between car and truck where we can produce anything. . B point is tangent in ppf
where it shows the efficient situation between car and truck at B point. C point repents the ppf
curve. Where, we can produce anything.
At F point, Points outside the ppf are unattainable. Points inside it are inefficient since resources
are not being fully employed. All of this line is called efficient line. Because some resources is
left. We can produce anything .That is called production possibility frontier.
1.3. Compare, using real world examples, the relative merits of alternative economic arrangements for
overcoming the problem of scarcity in society?
Different societies are organized through the relative alternative economic systems and economic
studies the various mechanisms that a society can use to allocate its scarce resources. We generally
distinguish 2 fundamentally different ways of organizing an economy. But there are 3 ways to
improve our economy:
1) Market economy
2) Command economy
3) Mixed economy
1) Market economy: A market economy is one in which inviduals and private firms make the
major decisions about production and consumption. I market economy; people select what
should be done. It is also similar to democracy. It also talks about the laissez-faire economy
where the go keeps its hands off economic decisions.
2) Command economy: A command economic system is one in which the gov makes all the
important decisions about production and distribution. Ex: during 12th
century Soviet Union
had command economy.
3) Mixed economy: A mixed economy is one in which the element of gov control are
intermingled with market elements in organizing production and consumption ex: in our
present situation, we have mixed economy.

4. Therefore all societies have different combinations of command and market but all
societies arte mixed economics. So, these are the real examples of the relative alternative
economic arrangements of overcoming scarcity resources.
2.1. Explain, in words and with diagrams, the concept of equilibrium in a supply and demand model
and illustrate the effects on equilibrium price and quantity of changes in market conditions.
The Determination of Price and Quantity
The logic of the model of demand and supply is simple. The demand curve shows the quantities
of a particular good or service that buyers will b e willing and able to purchase at each price
during a specified period. The supply curve shows the quantities that sellers will offer for sale at
each price during that same period. By putting the two curves together, we should be able to find
a price at which the quantity buyers are willing and able to purchase equals the quantity sellers
will offer for sale.
Figure 3.14, “The Determination of Equilibrium Price and Quantity” combines the demand and
supply data introduced in Figure 3.1, “A Demand Schedule and a Demand Curve” and
Figure 3.8, “A Supply Schedule and a Supply Curve” Notice that the two curves intersect at a
price of $6 per pound—at this price the quantities demanded and supplied are equal. Buyers want
to purchase, and sellers are willing to offer for sale, 25 million pounds of coffee per month. The
market for coffee is in equilibrium. Unless the demand or supply curve shifts, there will be no
tendency for price to change. The equilibrium price in any market is the price at which quantity
demanded equals quantity supplied. The equilibrium price in the market for coffee is thus $6 per
pound. The equilibrium quantity is the quantity demanded and supplied at the equilibrium price.
Figure 3.14. The Determination of Equilibrium Price and Quantity

5. When we combine the demand and supply curves for a good in a single graph, the point at which
they intersect identifies the equilibrium price and equilibrium quantity. Here, the equilibrium
price is $6 per pound. Consumers demand, and suppliers supply, 25 million pounds of coffee per
month at this price.
With an upward-sloping supply curve and a downward-sloping demand curve, there is only a
single price at which the two curves intersect. This means there is only one price at which
equilibrium is achieved. It follows that at any price other than the equilibrium price, the market
will not be in equilibrium. We next examine what happens at prices other than the equilibrium
price.
Surpluses
Figure 3.15, “A Surplus in the Market for Coffee” shows the same demand and supply curves we
have just examined, but this time the initial price is $8 per pound of coffee. Because we no
longer have a balance between quantity demanded and quantity supplied, this price is not the
equilibrium price. At a price of $8, we read over to the demand curve to determine the quantity
of coffee consumers will be willing to buy—15 million pounds per month. The supply curve tells
us what sellers will offer for sale—35 million pounds per month. The difference, 20 million
pounds of coffee per month, is called a surplus. More generally, a surplus is the amount by which
the quantity supplied exceeds the quantity demanded at the current price. There is, of course, no
surplus at the equilibrium price; a surplus occurs only if the current price exceeds the equilibrium
price.

6. Shifts in Demand and Supply in eq in market conditions:
Figure 3.17. Changes in Demand and Supply
A change in demand or in supply changes the equilibrium solution in the model. Panels (a) and
(b) show an increase and a decrease in demand, respectively; Panels (c) and (d) show an increase
and a decrease in supply, respectively.
A change in one of the variables (shifters) held constant in any model of demand and supply will
create a change in demand or supply. A shift in a demand or supply curve changes the
equilibrium price and equilibrium quantity for a good or service. Figure 3.17, “Changes in
Demand and Supply” combines the information about changes in the demand and supply of
coffee presented in Figure 3.2, “An Increase in Demand” Figure 3.3, “A Reduction in Demand”
Figure 3.9, “An Increase in Supply” and Figure 3.10, “A Reduction in Supply” In each case, the
original equilibrium price is $6 per pound, and the corresponding equilibrium quantity is 25
million pounds of coffee per month. Figure 3.17, “Changes in Demand and Supply” shows what
happens with an increase in demand, a reduction in demand, an increase in supply, and a
reduction in supply. We then look at what happens if both curves shift simultaneously. Each of
these possibilities is discussed in turn below.
An Increase in Demand

7. An increase in demand for coffee shifts the demand curve to the right, as shown in Panel (a) of
Figure 3.17, “Changes in Demand and Supply”. The equilibrium price rises to $7 per pound. As
the price rises to the new equilibrium level, the quantity supplied increases to 30 million pounds
of coffee per month. Notice that the supply curve does not shift; rather, there is a movement
along the supply curve.
Demand shifters that could cause an increase in demand include a shift in preferences that leads
to greater coffee consumption; a lower price for a complement to coffee, such as doughnuts; a
higher price for a substitute for coffee, such as tea; an increase in income; and an increase in
population. A change in buyer expectations, perhaps due to predictions of bad weather lowering
expected yields on coffee plants and increasing future coffee prices, could also increase current
demand.
A Decrease in Demand
Panel (b) of Figure 3.17, “Changes in Demand and Supply” shows that a decrease in demand
shifts the demand curve to the left. The equilibrium price falls to $5 per pound. As the price falls
to the new equilibrium level, the quantity supplied decreases to 20 million pounds of coffee per
month.
Demand shifters that could reduce the demand for coffee include a shift in preferences that
makes people want to consume less coffee; an increase in the price of a complement, such as
doughnuts; a reduction in the price of a substitute, such as tea; a reduction in income; a reduction
in population; and a change in buyer expectations that leads people to expect lower prices for
coffee in the future.
An Increase in Supply
An increase in the supply of coffee shifts the supply curve to the right, as shown in Panel (c) of
Figure 3.17, “Changes in Demand and Supply”. The equilibrium price falls to $5 per pound. As
the price falls to the new equilibrium level, the quantity of coffee demanded increases to 30
million pounds of coffee per month. Notice that the demand curve does not shift; rather, there is
movement along the demand curve.
Possible supply shifters that could increase supply include a reduction in the price of an input
such as labor, a decline in the returns available from alternative uses of the inputs that produce
coffee, an improvement in the technology of coffee production, good weather, and an increase in
the number of coffee-producing firms.
A Decrease in Supply
Panel (d) of Figure 3.17, “Changes in Demand and Supply” shows that a decrease in supply
shifts the supply curve to the left. The equilibrium price rises to $7 per pound. As the price rises
to the new equilibrium level, the quantity demanded decreases to 20 million pounds of coffee per
month.

8. Possible supply shifters that could reduce supply include an increase in the prices of inputs used
in the production of coffee, an increase in the returns available from alternative uses of these
inputs, a decline in production because of problems in technology (perhaps caused by a
restriction on pesticides used to protect coffee beans), a reduction in the number of coffee-
producing firms, or a natural event, such as excessive rain.
2.2. Examine, using appropriate supply and demand diagrams, the effects of taxes and subsidies and the
effects of price ceilings and price floors on market price and quantity traded?
Taxes reduce both demand and supply, and drive market equilibrium to a price that is higher than
without the tax and a quantity that is lower than without the tax.
Actual and Statutory Incidence of Tax
Tax authorities usually require either the buyer or the seller to be legally responsible for payment
of the tax. Tax incidence is the way in which the burden of a tax is shared among the market
participants (“who bears the cost?”). Taxes will typically constitute a greater burden for
whichever party has a more inelastic curve – e.g., if supply is inelastic and demand is elastic, the
burden will be greater on the producers.
Suppose that a state government imposes a tax upon milk producers of $1 per gallon.
Figure 3.7: Incidence of Tax
Figure 3.7 shows the original price for milk was $2 per gallon. After imposition of the tax, the
supply curves shift up and to the left. Consumers pay $2.60 per gallon. Sellers receive $1.60 per
gallon after paying the tax. So sixty cents of the tax is actually paid by consumers, while forty
cents is paid by the milk producers.
The triangle ABC above represents the deadweight loss due to taxation, which occurs because
now there are fewer mutually beneficial exchanges between buyers and sellers. Deadweight loss

9. stems from foregone economic activity and is a loss that does not lead to an offsetting gain for
other market participants; it is a permanent decrease to consumer and/or producer surplus.
Elasticity of Supply and Demand and the Incidence of Tax
If buyers have many alternatives to a good with a new tax, they will tend to respond to a rise in
price by buying other things and will, therefore, not accept a much higher price. If sellers easily
can switch to producing other goods, or if they will respond to even a small reduction in
payments by going out of business, then they will not accept a much lower price. The incidence
of the tax will tend to fall on the side of the market that has the least attractive alternatives and,
therefore, has a lower elasticity.
Cigarettes are one example where buyers have relatively few options; we would therefore expect
the primary burden of cigarette taxes to fall upon the buyers.
A subsidy shifts either the demand or supply curve to the right, depending upon whether the
buyer or seller receives the subsidy. If it is the buyer receiving the subsidy, the demand curve
shifts right, leading to an increase in the quantity demanded and the equilibrium price. If the
seller receives the subsidy, the supply curve shifts right and the quantity demanded will increase,
while the equilibrium price decreases.
A quota limits the amounts of a good that can be produced. If the quota is greater than what
would be produced under normal market conditions, then it will have no effect. If the amount is
less, than the market equilibrium that is achieved will be at a higher price than what would occur
without the quota, as consumers will be willing to pay more.
Making a good or service illegally impacts demand, supply and market equilibrium by imposing
a cost (prosecution and punishment) on the buyer or seller (or both) of the good/service.
Quantities of illegal goods will always be less than if they were legal, but the impact on price is
determined by whether the buyer or seller (or both) is punished. If the only the buyer is
penalized, the equilibrium price will be lower; the risk of punishment is regarded by buyers as a
cost, and reduces the price they will pay to the seller. If the seller is penalized, the equilibrium
price will be higher as the cost of punishment is factored into the seller’s cost. Prices will remain
relatively unchanged if the risk and cost of punishment is shared equally.
2.3. Identify examples of positive and negative externalities and, using supply and demand analysis,
demonstrate the effects of these externalities on the market equilibrium?
Economics studies two forms of externalities. An externality is something that, while it does not
monetarily affect the producer of a good, does influence the standard of living of society as a
whole.
A positive externality is something that benefits society, but in such a way that the producer
cannot fully profit from the gains made. A negative externality is something that costs the
producer nothing, but is costly to society in general.

10. Examples of positive externalities are environmental clean-up and research. A cleaner
environment certainly benefits society, but does not increase profits for the company responsible
for it. Likewise, research and new technological developments create gains on which the
company responsible for them cannot fully capitalize.
Negative externalities, unfortunately, are much more common. Pollution is a very common
negative externality. A company that pollutes loses no money in doing so, but society must pay
heavily to take care of the problem pollution caused.
The problem this creates is that companies do not fully measure the economic costs of their
actions. They do not have to subtract these costs from their revenues, which means that profits
inaccurately portray the company's actions as positive. This can lead to inefficiency in the
allocation of resources.
Because neither the market nor private individuals can be counted on to prevent this inefficiency
in the economy, the government must intervene. Ex:
b. The slope of Joe's demand curve for coffee in the price range of $5 and $4 is:
(5-4)/(2-4) = -1/2
c. In the price range of $2 and $1 it is: (2-1)/(8-10) = -1/2
d. The price of coffee and Joe's quantity demanded of coffee are negatively correlated. We can
tell this because we have a downward sloping line (or the slope is negative, or as price rises,
quantity falls).
e. If the price of coffee moves from $2 per cup to $4 per cup, the quantity demanded will fall
from 8 cups to 4 cups. This is a movement along the demand curve.
f. If Joe's income doubles from $20,000 to $40,000 per year, his demand curve shifts out, as
shown by the dark line in the graph above.
g. The doubling of Joe's income causes a shift in his demand curve, because income changed--
and income is not a variable which is measured on either axis.

11. 3.1. Define, measure and interpret: price elasticity of demand; price elasticity of supply; income
elasticity of demand and cross price elasticity of demand?
Price elasticity of demand : A measure of the responsiveness of the quantity demanded of a good to
a change in its price. It is calculated as:
Measure:
Price elasticity of demand (PED or Ed) is a measure used in economics to show the
responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its
price. More precisely, it gives the percentage change in quantity demanded in response to a one
percent change in price (holding constant all the other determinants of demand, such as income).
It was devised by Alfred Marshall.
Price elasticity’s are almost always negative, although analysts tend to ignore the sign even
though this can lead to ambiguity. Only goods which do not conform to the law of demand, such
as Veblen and Giffen goods, have a positive PED. In general, the demand for a good is said to be
inelastic (or relatively inelastic) when the PED is less than one (in absolute value): that is,
changes in price have a relatively small effect on the quantity of the good demanded. The
demand for a good is said to be elastic (or relatively elastic) when its PED is greater than one (in
absolute value): that is, changes in price have a relatively large effect on the quantity of a good
demanded.
Revenue is maximized when price is set so that the PED is exactly one. The PED of a good can
also be used to predict the incidence (or "burden") of a tax on that good. Various research
methods are used to determine price elasticity, including test markets, analysis of historical sales
data and conjoint analysis.
Interpret the Price Elasticity of Demand
The demand for a good is to a price change. The higher the price elasticity, the more sensitive
consumers are to price changes. Very high price elasticity suggests that when the price of a good goes
up, consumers will buy a great deal less of it and when the price of that good goes down, consumers will
buy a great deal more. Very low price elasticity implies just the opposite, that changes in price have little
influence on demand.
• If PEod> 1 then Demand is Price Elastic (Demand is sensitive to price changes)
• If PEod = 1 then Demand is Unit Elastic

12. • If PEod < 1 then Demand is Price Inelastic (Demand is not sensitive to price changes)
analyzing price elasticity, so PEod is always negative..
Price elasticity of supply: Price elasticity of supply (PES or Es) is a measure used in
economics to show the responsiveness, or elasticity, of the quantity supplied of a good or service
to a change in its price.
When the coefficient is less than one, the good can be described as inelastic; when the
coefficient is greater than one, the supply can be described as elastic. An elasticity of zero
indicates that quantity supplied does not respond to a price change: it is "fixed" in supply. Such
goods often have no labor component or are not produced, limiting the short run prospects of
expansion. If the coefficient is exactly one, the good is said to be unitary elastic.
The quantity of goods supplied can, in the short term, be different from the amount produced, as
manufacturers will have stocks which they can build up or run down.
Interpret the Price Elasticity of Supply
The price elasticity of supply is used to see how sensitive the supply of a good is to a price change. The
higher the price elasticity, the more sensitive producers and sellers are to price changes. A very high
price elasticity suggests that when the price of a good goes up, sellers will supply a great deal less of the
good and when the price of that good goes down, sellers will supply a great deal more. A very low price
elasticity implies just the opposite, that changes in price have little influence on supply.
• If PEoS > 1 then Supply is Price Elastic (Supply is sensitive to price changes)
• If PEoS = 1 then Supply is Unit Elastic
• If PEoS < 1 then Supply is Price Inelastic (Supply is not sensitive to price changes)
analyzing price elasticity, so pEod is always positive.
Income elasticity of demand: In economics, income elasticity of demand measures the
responsiveness of the demand for a good to a change in the income of the people demanding the
good, ceteris paribus. It is calculated as the ratio of the percentage change in demand to the
percentage change in income. For example, if, in response to a 10% increase in income, the
demand for a good increased by 20%, the income elasticity of demand would be 20%/10% = 2.
he Income Elasticity of Demand measures the rate of response of quantity demand due to a raise
(or lowering) in a consumers income. The formula for the Income Elasticity of Demand (IEoD)
is given by:
IEoD = (% Change in Quantity Demanded)/(% Change in Income)

13. Interpret the Income Elasticity of Demand
Income elasticity of demand is used to see how sensitive the demand for a good is to an income change.
The higher the income elasticity, the more sensitive demand for a good is to income changes. A very
high income elasticity suggests that when a consumer's income goes up, consumers will buy a great deal
more of that good. A very low price elasticity implies just the opposite, that changes in a consumer's
income has little influence on demand.
• If IEoD > 1 then the good is a Luxury Good and Income Elastic
• If IEoD < 1 and IEOD > 0 then the good is a Normal Good and Income Inelastic
• If IEoD < 0 then the good is an Inferior Good and Negative Income Inelastic
In our case, we calculated the income elasticity of demand to be 0.8 so our good is income
inelastic and a normal good and thus demand is not very sensitive to income changes.
Cross -price elasticity of demand:
Cross -price elasticity of demand measures the responsiveness of the demand for a good to a
change in the price of another good. It is measured as the percentage change in demand 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 demand of new cars that are
fuel inefficient decreased by 20%, the cross elasticity of demand would be: . A
negative cross elasticity denotes two products that are complements, while a positive cross
elasticity denotes two substitute products. These two key relationships go against one's
intuition, but the reason behind them is fairly simple: assume products A and B are
complements, meaning that an increase in the demand for A is caused by an increase in the
quantity demanded for B. Therefore, if the price of product B decreases, then the demand curve
for product A shifts to the right, increasing A's demand, resulting in a negative value for the
cross elasticity of demand. The exact opposite reasoning holds for substitutes.
Interpret the Cross-Price Elasticity of Demand
The cross-price elasticity of demand is used to see how sensitive the demand for a good is to a price
change of another good. A high positive cross-price elasticity tells us that if the price of one good goes
up, the demand for the other good goes up as well. A negative tells us just the opposite, that an increase
in the price of one good causes a drop in the demand for the other good. A small value (either negative
or positive) tells us that there is little relation between the two goods.
• If CPEoD > 0 then the two goods are substitutes
• If CPEoD =0 then the two goods are independent (no relationship between the two goods
• If CPEoD < 0 then the two goods are complements.
3.2. Explain, using diagrams and different concepts of demand elasticities, what is meant by each of the
following; normal goods; inferior goods; complements and substitutes.

14. Normal goods: in economics, normal goods are any goods for which demand increases when
income increases and falls when income decreases but price remains constant, i.e. with a positive
income elasticity of demand. The term does not necessarily refer to the quality of the good, but
an abnormal good would clearly not be in demand, except for possibly lower socioeconomic
groups.
Examples include Holidays, Cars, diamonds, branded fashions, hi-tech products etc.
Depending on the indifference curves, the amount of a good bought can increase, decrease, or
stay the same when income increases. In the diagram below, good Y is a normal good since the
amount purchased increases from Y1 to Y2 as the budget constraint shifts from BC1 to the
higher income BC2. Good X is an inferior good since the amount bought decreases from X1 to
X2 as income increases.
Inferior goods: an inferior good is a good that decreases in demand when consumer income rises,
unlike normal goods, for which the opposite is observed. This would be the opposite of a
superior good, one that is often associated with wealth and the wealthy, whereas an inferior good
is often associated with lower socio-economic groups.
Inferiority, in this sense, is an observable fact relating to affordability rather than a statement
about the quality of the good. As a rule, these goods are affordable and adequately fulfill their
purpose, but as more costly substitutes that offer more pleasure (or at least variety) become
available, the use of the inferior goods diminishes.
Depending on consumer or market indifference curves, the amount of a good bought can
increase, decrease, or stay the same when income increases.
Ex: Inexpensive foods like hamburger, frozen dinners, and canned goods are additional examples
of inferior goods.

15. Depending on the indifference curves, the amount of a good bought can increase, decrease, or
stay the same when income increases. In the diagram below, good Y is a normal good since the
amount purchased increases from Y1 to Y2 as the budget constraint shifts from BC1 to the
higher income BC2. Good X is an inferior good since the amount bought decreases from X1 to
X2 as income increases.
Compliment goods:
A complementary good is a good with a negative cross elasticity of demand, in contrast to a
substitute good. This means a good's demand is increased when the price of another
good is decreased. The demand for a good is decreased when the price of another good
is increased..
Ex: DVD players and DVDs, Computer hardware and computer software
A

16. B
Complementary goods exhibit a negative cross elasticity of demand: as the price of good Y rises, the
demand for good X falls. If goods A and B are complements, an increase in the price of A will
result in a leftward movement along the demand curve of A and cause the demand curve for B
to shift in; less of each good will be demanded. A decrease in price of A will result in a rightward
movement along the demand curve of A and cause the demand curve B to shift outward; more
of each good will be demanded
Substitute goods:
A substitute good, in contrast to a complementary good, is a good with a positive cross elasticity of
demand. This means a good's demand is increased when the price of another good is increased. The
demand for a good is decreased when the price of another good is decreased. Ex: margarine, butter.

17. If goods A and B are substitutes, an increase in the price of A will result in a leftward movement along
the demand curve of A and cause the demand curve for B to shift out. A decrease in the price of A will
result in a rightward movement along the demand curve of A and cause the demand curve for B to shift
in.
3.2. Examine the use of the concepts of elasticity by firms to analyze and evaluate market changes?
Marketers should never rest on their marketing decisions. They must continually use market
research and their own judgment to determine whether marketing decisions need to be adjusted.
When it comes to adjusting price, the marketer must understand what effect a change in price is
likely to have on target market demand for a product.
Understanding how price changes impact the market requires the marketer have a firm
understanding of the concept economists call elasticity of demand, which relates to how purchase
quantity changes as prices change. Elasticity is evaluated under the assumption that no other
changes are being made (i.e., “all things being equal”) and only price is adjusted. The logic is to
see how price by itself will affect overall demand. Obviously, the chance of nothing else
changing in the market but the price of one product is often unrealistic. For example, competitors
may react to the marketer’s price change by changing the price on their product. Despite this,
elasticity analysis does serve as a useful tool for estimating market reaction.
Elasticity deals with three types of demand scenarios:
• Elastic Demand – Products are considered to exist in a market that exhibits elastic
demand when a certain percentage change in price results in a larger and opposite
percentage change in demand. For example, if the price of a product increases (decreases)
by 10%, the demand for the product is likely to decline (rise) by greater than 10%.
• Inelastic Demand – Products are considered to exist in an inelastic market when a certain
percentage change in price results in a smaller and opposite percentage change in
demand. For example, if the price of a product increases (decreases) by 10%, the demand
for the product is likely to decline (rise) by less than 10%.
• Unitary Demand – This demand occurs when a percentage change in price results in an
equal and opposite percentage change in demand. For example, if the price of a product
increases (decreases) by 10%, the demand for the product is likely to decline (rise) by
10%.
For marketers the important issue with elasticity of demand is to understand how it impacts
company revenue. In general the following scenarios apply to making price changes for a given
type of market demand:
• For elastic markets – increasing price lowers total revenue while decreasing price
increases total revenue.

18. • For inelastic markets – increasing price raises total revenue while decreasing price lowers
total revenue.
• For unitary markets – there is no change in revenue when price is changed.