1. 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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4.  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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5.  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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7.  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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8. Price Elasticity of Demand
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Quantity Supplied and Demanded
Price
Ed > 1
Ed < 1
Ed = 1

9. Polar Extreme Cases of Price Elasticity of Demand
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Quantity Supplied and Demanded
Price
Perfectly
Inelastic
Demand
Perfectly Elastic Demand

10. Price Elasticity, Total Revenue
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P ($) Q Ep TR=P.Q
6 0 -∞ 0
5 100 -5 500
4 200 -2 800
3 300 -1 900
2 400 -0.5 800
1 500 -0.2 500
0 600 0 0

11.  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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12.  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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14.  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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15.  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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16.  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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17. 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