Economics for Manager Question Answer 2022

Running head: ECONOMICS FOR MANAGER
Economics for Manager
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ECONOMICS FOR MANAGER1
Question 1
The idea of price elasticity of demand is a vital concept related measuring responsiveness
of demand associated with a price change. In economic terms it is defined as proportionate
alteration in quantity demanded of a product relative to the proportionate change in own price of
the product (Jawad et al., 2018). The formula for price elasticity of demand is given as
Price elasticity of demand= Percentage change∈quantity demanded
Percentage change∈ price
Depending on relative magnitude of change in price and quantity demanded of a good,
price elasticity of demand is classified into several kinds. Based on relative price elasticity of
demand, demand is of five types – perfectly elastic demand, perfectly inelastic demand,
relatively elastic demand, relatively inelastic demand and unitary elastic demand.
Perfectly elastic demand
Demand for a product is considered as perfectly elastic when quantity demanded of the
good changes infinitely for only a small change in price. The computed measure of elasticity in
this case is infinity. In this case the demand curve is found to be horizontal that is parallel to
quantity axis (Coglianese et al., 2017). This does not have much practical implication as goods in
real life

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Figure 1: Perfectly elastic demand
Perfectly inelastic demand
Perfectly inelastic demand refers to the kind of demand where demand remains
unchanged corresponding to any change in price. computed elasticity of demand in this case 0.
Demand curve having this kind of elasticity is vertical that is parallel to the vertical axis. This is
again an extreme case of price elasticity of demand as goods with perfectly inelastic demand are
rarely found in real life.
Figure 2: Perfectly inelastic demand

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Relatively elastic demand
In situations where relative change in quantity demanded of a good exceeds the relative
change in price of the good. The measured price elasticity of demand in this case is greater than
1 making the demand curve flatter (Ben Lakhdar, Vaillant & Wolff, 2016). Luxury goods such as
cars, furniture, television and others have relatively elastic demand.
Figure 3: Relatively elastic demand
Relatively inelastic demand
Relatively inelastic demand is one where proportionate variation in quantity demanded is
relatively less than proportionate variation in price. Estimated elasticity of demand here is less
than 1 making the demand curve steeper. Goods used for daily consumption like salt, rice, wheat
and such other have a relatively inelastic demand.

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Figure 4: Relatively inelastic demand
Unitary elastic demand
Demand is considered as unitary elastic when measured price elasticity of demand is
equal to 1. In this case proportionate variation in quantity demanded of the good is same as
proportionate alteration in price. The demand curve in this case shapes like a rectangular
hyperbola. This is an imaginary case since this kind of elasticity is generally not found in real
world.