Eco 101 Microeconomics: Analyzing Elasticity and Demand Concepts

This microeconomics assignment defines and differentiates between price elasticity of demand and supply, contrasting elastic and inelastic demand through demand curves and real-world examples like tea and coffee substitutes. It elucidates the relationship between the slope of a demand curve and elasticity, highlighting how they measure consumer response to price changes, and explains how the availability of substitutes impacts demand elasticity. The assignment also addresses the effect of price changes on a firm's total revenue when demand is elastic, emphasizing the importance of maintaining optimal pricing strategies. The document includes relevant references and diagrams to support the analysis.

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Question 1
Price elasticity is the proportion between changes in the percentage of quantity commanded or
suppliers with corresponding alteration in price percentage.
 Price elasticity of demand: - The price elasticity of demand is referred to as the
percentage alteration in the quantity of goods and services commanded divided by the
change in the fraction of the price (Norman, 2014).
(Source: Cowell, 2018)
 Price elasticity of supply: - The price elasticity of supply is the fluctuation in the
percentage of the quantity delivered that is divided by the fluctuation in the percentage of
the price (Norman, 2014).

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(Source: Cowell, 2018)
Difference between inelastic and elastic demand
Some of the points that reflect the difference are discussed below: -
Basis of
Differences
Elastic demand Inelastic demand
Meaning The slight change in price of goods or
product brings the substantial change in
the quantity which is required is known
as elastic demand (Norman, 2014).
The change in the price of a better
outcome brings no or minor change
in the quantity that has been
demanded by customers is known as
inelastic demand.
Demand curve The demand curve remains shallow. The demand curve remains Steep.
Elasticity
Quotient
Needs to be equal to or more than 1 Less than 1
Price and total
revenue
Move forward in the opposed direction Move forward in the identical
direction
Goods/ It majorly includes comfort and luxury This majorly includes the necessary

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product products. products which are demanded by
customers (Norman, 2014).
Diagram The diagram of the demand elastic
reflects that with the reduction in the
price from 200 to 100 shift the quantity
from 5 to 10.
The diagram of the demand inelastic
reflects that there is a slight shift in
the quantity demanded by the
customers with the major shift in the
price from 200 to 100.
Question 2
The elasticity of demand and slope of demand curve are used with the common purpose of
measuring the change in customer quantity commanded in response to change in the price.
Though, concept of the two terms is dissimilar from each other. The slope of the demand curve is
drawn with the price on vertical axis and demand on the horizontal axis (DeCicca and Kenkel,
2015). The slope reflects the item's price required to be changed for the customers to ask for or
demand for the additional unit of it. On the other hand, demand elasticity reflects the sensitive
demand for the products is about to change due to economic variables which include price and

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consumer income. Thus, this reflects the potential change in demand due to change in price. The
demand elasticity is calculated with the percentage change in the demanded quantity by a
percentage change in another variable change.
If the demand curve is a straight line then it is considered that its slope is constant. However, the
demand elasticity changes at every point of the curve with the negatively sloped straight line
demand curve. In addition to this, the demand elasticity rises as there will be forward movement
on the demand curve which includes high prices and low quantities. Further, the demand
elasticity decreased as there will be down moving on the curve which include lower prices and
higher quantities.
While measuring the slope, the change in quantity remains in denominator and price change
remain in the numerator. In the case of elasticity, change in quantity percentage remains in
numerator and change in price percentage is in the denominator (Rader, 2014). Thus, if demand
curve remains vertical then slope is equivalent to infinity and elasticity of demand remains Zero
that means the slope reflects the perfectly inelastic. If the demand curve is horizontal then the
slope remains Zero and the elasticity of the demand remains infinity which shows perfectly
elastic.
Question 3
Substitution is considered as the key factor in identifying how elastic or inelastic a demand curve
will be. If the close substitute is present in the marketplace then demand for the goods would be
more elastic (Ghosh, 2018). For instance; tea has a close substitute in the form of coffee which is
easily available in the market. The rise in the price of coffee leads to the fall in the demand for
coffee and a consequent rise in the demand for tea. Thus, the coffee demand would be relatively

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more elastic because of the presence of tea. In addition to this, the price of the coffee reduces
which makes people reduce the consumption of tea and start consuming coffee which increases
the demand for coffee (Nicklos, 2018). This shows that the demand for the coffee would be
relatively more elastic because of the availability of tea in the market. The example reflects that
the more of the number of close substitutes of a product leads to the more price-elasticity of
demand for the product. Thus, this is the reason due to which the substitute of the product is
considered as an important factor in determining the elasticity of demand.
(Source: Ghosh, 2018)
The conditions in which the demand of the products remains more elastic takes place when there
will be a rise in the number of substitutes that are present in the market. The rise in the substitute
will create a major impact on the demand asked by the customers related to the products
available in the market (Beggs, 2017). This is possible because in the competitive market the
customers can easily switch to the other products that can meet their demand.

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Question 4
If a firm raised its price and its demand is elastic then the total revenue of the company will fall.
This is supported with the concept of the elastic demand which says the demand of the quantity
asked by the customers change when the firm brings the change in the price. The less demand for
the quantity leads to the decrease in the profit of the company. However, the aim due to which
the company work in the market is to increase the profit to the maximum (DeCicca and Kenkel,
2015). Thus, the company needs to maintain a standard price when they are aware that the
demand is elastic for them.

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References
Beggs, J. (2017) How Slope and Elasticity Are Related [Online]. Available from:
https://www.thoughtco.com/elasticity-versus-slope-of-demand-curve-1147361 [Accessed on 24th
November 2018]
Cowell, F. (2018) Microeconomics: principles and analysis. Oxford University Press.
DeCicca, P. and Kenkel, D. (2015) Synthesizing Econometric Evidence: The Case of Demand
Elasticity Estimates. Risk Analysis, 35(6), pp.1073-1085.
Ghosh, V. (2018) Factors Affecting the Price Elasticity of Demand | Economics [Online].
Available from: http://www.economicsdiscussion.net/elasticity-of-demand/factors-affecting-the-
price-elasticity-of-demand-economics/22226 [Accessed on 24th November 2018]
Nicklos, S. (2018) Which factors are more important in determining the demand elasticity of a
good or service? [Online]. Available from:
https://www.investopedia.com/ask/answers/040715/which-factors-are-more-important-
determining-demand-elasticity-good-or-service.asp [Accessed on 24th November 2018]
Norman, G. (2014) Price Elasticity of Demand. In Dictionary of Industrial Organization.
Edward Elgar Publishing Limited.
Norman, G. (2014) Price Elasticity of Supply. In Dictionary of Industrial Organization. Edward
Elgar Publishing Limited.
Rader, T. (2014) Theory of microeconomics. Academic Press.

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