Price Elasticity of Demand and Supply: A Comprehensive Analysis

Eco 101 Microeconomics
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Contents
1. Define the price elasticity of demand and the price elasticity of supply. What is the difference
between elastic and inelastic of demand..................................................................................................3
2. Both the slope of the demand curve and the elasticity of demand are measures of how consumers
alter their quantities demanded in response to changes in price. How are the two concepts different
from each other? Given a negatively sloped straight-line demnd curve, how will slope and elasticity
differ? Given a vertical or horizontal demand curve, how will they differ..............................................6
3. Why is substitution the key factor in determining how elastic or inelastic a demand curve will be?
Under what conditions will demand be more elastic...............................................................................8
4. What will happen to total revenue of a firm if it raises its price and its demand is elastic (or
inelastic)................................................................................................................................................10
References.................................................................................................................................................11
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1. Define the price elasticity of demand and the price elasticity of supply. What is the
difference between elastic and inelastic of demand.
The price elasticity of demand is relatively inelastic is the percentage change in quantity
demanded is smaller than that of the price (Tutor2U, 2018). It also depicts the correlation
between the price and number demanded and also shows that how the change in one affect the
change in other one.
Image: Price Elasticity Graph
Source: Economics Online, 2018
Price elasticity of demand= % change in quantity demanded/ % change in price
This calculation is done so as to evaluate the effect of price change on the quantity demanded
and on the revenue which is received by the firms (Economics Online, 2018).
Price elasticity of supply is used to show the receptiveness of the quantity supplied of a good to
the altered price of goods and services. It takes into considerations various determinants such as
time to respond, availability of raw materials and inventories (Economics Online, 2018).
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Image: Elasticity of Supply
Source: Tutor2U, 2018
Price Elasticity of Supply= % change in quantity supplied/ % change in price
There are three cases such as:
 The perfectly elastic where the supply of goods in infinite at the particular price.
 Perfectly Inelastic where only single quantity can be supplied.
 Unitary elastic where the elasticity is 1 (Difference, 2017).
Difference between elastic and inelastic demand
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