Microeconomics Assignment: Analyzing Price Elasticity of Demand

This microeconomics assignment delves into the concept of price elasticity of demand, defining it as the responsiveness of quantity demanded to changes in price. It explains the law of demand and distinguishes between elastic and inelastic demand, providing formulas and examples. The assignment includes graphical representations of demand curves, illustrating how changes in price affect quantity demanded and explaining the difference between slope and elasticity. It also covers perfectly elastic and inelastic demand scenarios. Furthermore, the assignment discusses factors influencing elasticity, particularly the availability of substitutes, and analyzes how elasticity affects a firm's total revenue, demonstrating that firms can increase revenue by adjusting prices based on the elasticity of demand. The document concludes with a list of references.

0Running head: MICROECONOMICS
Microeconomics
Name of the student
Name of the University
Author note

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Table of Contents
ANSWER 1.............................................................................................................................................2
ANSWER 2.............................................................................................................................................3
ANSWER 3.............................................................................................................................................6
ANSWER4..............................................................................................................................................6
REFERENCE LIST.....................................................................................................................................8

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ANSWER 1
Price elasticity of demand relates change inquantity demanded of product in respect to
change in product price. It is a term which is usually used in economics to measure the
changes in demand after the price of a particular goods or services changes(Mankiw. 2015)
Price elasticities are usually negative most of the times. The amount the consumers desires to
pay for a good is known as demand. When there is a rise in price people demands less. This
negative relationship between price and the quantity of the commodity demanded is referred
to law of demand. When the price elasticity of demand is more than unity, it will have elastic
demand on the other hand when the price elasticity of demand is below one, it can be termed
as inelastic demand. The price elasticity of demand therefore can be measured by ed=
(dq/q)/(dp/p), where p is termed as the price of the good demanded and q is the quantity of
the demanded item. From the above formulae therefore, it can be stated that price elasticity
can also be defined as % change in the quantity of product demanded to the % change in the
price of the demanded quantity.
The price elasticity of supply is represented by % change in quantity of product
supplied to the % change in the price. It can be also measured as the degree of responsiveness
of the goods supplied to a changed in own price of the commodity. Supply has a close
relationship with demand. When there is an unlimited amount of goods supplied at a
particular price and the supply curve is parallel to the horizontal axis, the elasticity of supply
equals to unity and it is termed as perfectly elastic supply. In case of elastic demand a minor
change in price will drastically change the demand of the product. Therefore, in case of
elastic demand a slight change in price lead to drastic change in the demand of the product
(Mankiw. 2015). When there is little change in the amount of quantity demanded in respect

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to the change in price can be termed as an inelastic demand. The elasticity is less than one.
The necessity goods are an example of elastic demand.
ANSWER 2
Fig: 1 The negatively sloped demand curve
(Source: Mankiw 2014)
The above demand curve is negatively sloped states that when price increases, the
amount of quantity demanded falls from Q1 to Q2 when the initial price was P1, quantity
demanded was Q1. As soon as the price of the commodity increases from P1 to P2, the
amount of quantity demanded falls to Q2. There is a huge difference between the slope and
the elasticity of demand (Lin and Zeng. 2013). A demand curve may have a constant slope
but its elasticity differs at each point of the demand curve. The slope of the demand function
is the absolute change in price divided by an absolute change in quantity. On the other hand
elasticity of demand is completely opposite to the slope of demand and it is also multiplied by
the price quantity ratio. As elasticity is measured by using a percentage change therefore, it
usually remains unitless on the other hand slope of a demand have units.
P2
P1
Q2 Q1
QUANTITY
PRICE

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From the above diagram it can said that the slope of the demand at any particular point is the
ratio of absolute change in product price and the absolute change in product quantity.
Therefore, the slope of the demand curve is negative as when there is fall in price the quantity
demanded decreases. However, though the linear demand curve may be negatively sloped,
the elasticity of the demand may vary throughout the demand curve (Lichter, Peichl and
Siegloch. 2015). The slope of a straight line demand curve never changes but the elasticities
of the demand varies from 0 to infinites. However, when there is a linear demand curve line
the value of the slope will change. However, when the demand curve has a perfectly straight
lineor linear demand curve the midpoint B will be equal to which states that it is unit elastic
the segment which is present between the midpoint of the curve and the quantity axis is
usually relative inelastic where the elasticity is less than zero and more than one (Lin and
Zeng, 2013). On the other hand the segment which is present between the midpoint and the
price axis has relatively elastic demand curve which ranges from 0 to infinites. The
intersection point of the negatively sloped demand curve and the horizontal quantity axis has
elasticity equal to zero which is perfectly inelastic where the point of intersection of the price
axis and the demand curve has perfectly elastic demand where elasticity is equal to infinites.

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The elasticity of demand along the linear demand curve at various points.
(Source: Mankiw 2014)
The above diagram shows the degree of demand elaticities in the linear demand curve. The
elasticity is one at the midpoint. The elasticity of demand is the ratio of change in demand of
quantity in respect to price change. As this elasticity shows the responsiveness of the demand
in quantity to the change in price, this movement is shown along the demand curve. The
elasticity of price tends to be negative always both quantity and price does not move in the
same direction. It is seen that when the elasticities are computed at different points of the
demand curve which is linear, the slope will be usually constant.
E=1
E=0
E=∞
P
Q
0

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Figure:2 Perfectly elastic demand Figure: 3 Perfectly inelastic demand
(Source: Mankiw 2014) (Source: Mankiw 2014)
Figure 2 above shows that it has a horizontal demand curve which
suggests that the demand curve is perfectly elastic. Here elasticity (e) =∞. This means when
the change in price is negligiblethere will be a major change in demand. This means when
there will be a small rise in price the demand may fall down to zero and the demand will
increase to infinity when there will be a small decrease in price.
In the above figure3,there is a presence of vertical demand curve, which
suggest that the demand curve is perfectly inelastic and the elasticity (e)= 0. In case of
perfectly elastic demand there will be no change in the quantity demanded when there will be
change in the price. In this case the demand will remain the same at any particular price
P
Q
D
E=∞
Q
P E=0

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value. This kind of demand curve is seen in case of elastic goods. The numerical value of this
type of demand curve is zero.
ANSWER 3
Substitution is one of the main component in determining the elasticity of
a demand. When there is an availability of close substitutes, demand will be more
elastic(Nelson. 2013). When consumers will have many more options to choose from the
elasticity of the demand will be greater. Substitutes is the main component in determining the
elasticity of the demand. When a particular good will have a less number of substitutes it will
face an inelastic demand because whenever the price of that particular good will increase
consumer will not be able to switch to any other goods due to low availability of the
substitutes (Cashin. 2014). Therefore, the demand of the commodity will not fall when there
will be rise in the price which states the good has an inelastic demand. One of the famous
example of inelastic good is gasoline. Even though the price of gasoline may change its
demand will remain elastic(Gordon, Goldfarb and Li 2013). On the other hand the demand
curve will be elastic when consumers can easily switch to other goods. If there is an increase
in the price of a specific product, the demand of its substitutes will also increase in that case
as there will be more options for the consumers to buy the similar goods. Therefore, when
price increases consumers change their choices and the demand for substitutes rises. An
example of elastic good is motor vehicles.
Demand will be more elastic when there will be availability of more substitutes. To be
specific, more the number of substitutes more will be the degree of elasticity. Demand will be
more elastic in the case when the quantity demanded affects greatly with the change in price.
When there is an increase in price and the quantity demanded varies greatly, it can be said

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that the particular product has an elastic demand. Therefore, more the presence of substitutes
more elastic will be the demand.
ANSWER4
When the demand will be inelastic demand the firm will earn more revenue as
revenue is the product of price and quantity. Therefore, in case of inelastic demand as the
quantity demanded will not fall due to rise in price, the firm will earn huge revenue by
increasing its price. When there is presence of an inelastic demand increase in price will
result to the rise in total revenue because the rise in price will not have a huge impact on the
quantity demanded of goods(Nelson. 2013). However, in case of elastic demand the case is
opposite. In case of elastic demand rise in price will decrease the total revenue.When there is
an elastic demand rise in price will eventually lead to decrease in the quantity demanded,
therefore the product of quantity and price will also fall which in turn reduces the total
revenue(Gordon, Goldfarb and Li 2013). Therefore, different commodities will have different
elasticity based on the demand. When there is an increase in price it will have a huge impact
on the quantity demanded, it can be said that when there is a rise in price it willlead to
decrease the total revenue for elastic demand.When a particular firm increases its price and
that product has an elastic demand then the firm’s revenue will also vary greatly. However,
when the commodity has an inelastic demand the revenue of a firm will does no vary much as
the demand will not deviate much whatever the firm charges. Different product usually have
different elasticity based on the necessities of people(Friedman 2017). There is also a test of
total revenue which is used for determination of elastic or inelastic demand. There will be rise
in revenue with the rise in price when there will be presence of inelastic demand because with
the increase in price, it does not have huge effect on the amount of quantity demanded. When
there is a fall in total revenue due to rise in price, the product is said to have an elastic
demand.

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REFERENCE LIST
Baldwin, E. and Klemperer, P., 2016. Understanding Preferences:'Demand Types', and The
Existence of Equilibrium with Indivisibilities.
Bas, M., Mayer, T. and Thoenig, M., 2017. From micro to macro: Demand, supply, and
heterogeneity in the trade elasticity. Journal of International Economics, 108, pp.1-19.
Becker, G.S., 2017. Economic theory. Routledge.
Cashin, P., Mohaddes, K., Raissi, M. and Raissi, M., 2014. The differential effects of oil
demand and supply shocks on the global economy. Energy Economics, 44, pp.113-134.
Coglianese, J., Davis, L.W., Kilian, L. and Stock, J.H., 2017. Anticipation, tax avoidance,
and the price elasticity of gasoline demand. Journal of Applied Econometrics, 32(1), pp.1-15.
Edler, J. and Yeow, J., 2016. Connecting demand and supply: The role of intermediation in
public procurement of innovation. Research Policy, 45(2), pp.414-426.
Friedman, M., 2017. Price theory. Routledge.
Gordon, B.R., Goldfarb, A. and Li, Y., 2013. Does price elasticity vary with economic
growth? A cross-category analysis. Journal of Marketing Research, 50(1), pp.4-23.
Karlan, D. and Zinman, J., 2018. Price and control elasticities of demand for savings. Journal
of Development Economics, 130, pp.145-159.
Laibson, D. and List, J.A., 2015. Principles of (behavioral) economics. American Economic
Review, 105(5), pp.385-90.
Lichter, A., Peichl, A. and Siegloch, S., 2015. The own-wage elasticity of labor demand: A
meta-regression analysis. European Economic Review, 80, pp.94-119.

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Lin, C.Y.C. and Zeng, J.J., 2013. The elasticity of demand for gasoline in China. Energy
Policy, 59, pp.189-197.
Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.
Mankiw, N.G., 2015. Ten principles of economics. Principles of Economics, pp.3-18.
Nelson, R.R., 2013. Demand, supply, and their interaction on markets, as seen from the
perspective of evolutionary economic theory. Journal of Evolutionary Economics, 23(1),
pp.17-38.
Teytelboym, A., 2014. Gross substitutes and complements: A simple generalization.
Economics Letters, 123(2), pp.135-138.