Microeconomics: Exploring the Concepts of Price Elasticity of Demand

This microeconomics assignment provides a detailed explanation of price elasticity of demand and supply, differentiating between elastic and inelastic demand. It discusses how the slope of the demand curve relates to demand elasticity, highlighting the impact of substitutes on demand elasticity and the effect of price changes on a firm's total revenue. The assignment uses relevant examples to illustrate key concepts, offering a comprehensive understanding of how consumers and businesses respond to price fluctuations in the market. Desklib offers a wealth of similar solved assignments and past papers to aid students in their studies.

MICROECONOMICS 1
MICROECONOMICS
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MICROECONOMICS 2
NUMBER 1.
The price elasticity of demand refers to an economic measure which is used in showing how the
quantity demanded of a given commodity reacts to its alteration of price (Anderson et al 2012,
p.2010). Only the price change of the service or good is considered when the facts are held
constant. The price elasticity of demand indicates the change in percentage of a certain good or
service quantity demanded in response to price change by one percent. It’s always greater than
one and negative for goods and services which obey the law of demand but the negative sign is
ignored for the purposes of avoiding ambiguity. Only Giffen and Veblen goods have price
elasticity of demand being positive.
The price elasticity of supply is an economic measure which is used in showing how the quantity
supplied of a given good or service reacts to its price change (Norman 2014, p.334). Only the
price is considered when all the factors are kept constant. It is always positive and greater than
one. The price elasticity of supply is indicated in numerical form as a dividend of the quantity
supplied percentage change and the price change percentage.
An elastic demand refers to a demand in which a very slight alteration of the factors determining
demand especially the price of a given service or good results to a great change in the quantity
demanded of that service or good. It is usually greater than one. An inelastic demand refers to a
demand in which the alteration of the factors determining demand especially the price of a given
good or service results to a little or no change at all in the quantity demand of that good or
service.
NUMBER 2.

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The slope of the demand curve and the demand elasticity both measure the consumers’
responsiveness to quantities of commodities demanded due to a change in prices of the
commodities however the two concepts differ. The slope of the demand curve measures the
steepness of the demand curve using the units of measurement of the price and quantity. On the
other hand, the elasticity of demand measures consumer’s responsiveness to the quantity of a
commodity demanded due to a change in price of the given commodity.
A negatively sloped straight line demand curve has a constant negative slope but the negative
sign is ignored for the purpose of avoiding ambiguity. Considering the elasticity of demand
along the demand curve which is negatively sloped and straight, its values change at each point
along the demand curve. When the slope of the demand curve is steeper, then the elasticity of the
product is less elastic. This means that elasticity of demand decreases as we move up along the
demand curve (lower quantities demand and higher prices) and increases as we move down the
demand curve (higher quantities demanded and lower prices).
The slope of the demand curve and the elasticity of demand differ as explained in case the
demand curve is vertical or horizontal. In measuring the slope of the demand curve, the
numerator is the change in values of price while the denominator is the change in values of the
quantity demanded. On the other hand in measuring the demand elasticity, the change in the
price values percentage is the numerator and the change in the quantities demanded percentage is
the denominator. For the case of a vertical demand curve, the slope of the demand curve is
infinite as there is a change in price but the change in quantity demanded is zero. The elasticity
of demand is on the other hand is zero as there is no any quantity percentage change but there is
a price percentage change. In this case, we say that elasticity is perfectly inelastic. For the case of

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the horizontal demand curve, slope of the demand curve is zero as no price but there is a change
in quantity demanded. On the other hand, the elasticity of demand is infinite since there is a
quantity demanded percentage change but there is no price percentage change. In this case, we
say that the elasticity of demand is perfectly inelastic. In establishing the difference between the
two, it is important to note that any number divide by zero is infinite while zero divide by any
number is zero.
NUMBER 3.
Substitution is the key factor which determines how elastic or less elastic the demand curve of a
given good or service will be. The availability of more close substitutes of a given good or
service increases the consumer’s tendency to shift or quit purchasing the commodity in case its
price increases. This means that consumers’ tendency of responding to an increase in price of a
given commodity is highly influenced by the availability of close substitutes. If close substitutes
are available in plenty, a slight increase in the price of a given commodity will make customers
to shift to purchasing the other cheaper close substitutes. In scenarios whereby the close
substitutes are few or not available at all, an increase in price of a given good will have no
impact on its demand as a few of its substitutes are only available. This means that the demand
curve of a given good will be more elastic in case close substitutes are available in plenty but less
elastic in absence of close substitutes and hence substitution remains to be the key determinant of
demand elasticity.
In case the price of a given good increases while the consumer level of income remains constant,
the demand for that good becomes more elastic. A good may be considered to be luxurious by
consumers. The demand for such a good will remain more elastic. If more close substitutes to a

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given good are available in the job market, the demand for that good remains to be more elastic
as an attempt to raise the price of the good will shift many consumers to purchasing the cheaper
close substitutes. If the customer has more time available to move around the market doing
shopping, he/she is likely to find cheaper goods on the way and this makes the demand for the
good of interest more elastic.
NUMBER 4.
The total revenue of a firm is obtained by multiplying price of a commodity by its quantity
demanded value. In case the demand for a firm’s goods and services is elastic and their prices
rise, then it means that the percentage of the quantity demanded drops by a huge margin than that
of the price increase. This means that the total revenue of the firm which is obtained by
multiplying the new price after it is increased and the new quantity demanded after it drops,
generally decreases.
In case the demand for a firm’s goods and services is inelastic, this means that an increase in the
prices of the goods and services has little or no effect at all in their demand. This means that
consumers still purchase the goods and services the way they used to or slightly decrease their
demand. This therefore means that the total revenue of the firm will increase if the price increase
had no effect at all or had a slight effect on the demand of the goods and services which was less
than the price increase percentage. However, the total revenue of the firm can also decrease
slightly if the increases in the prices of goods and services had a little effect on their demand
which was more than the price percentage increase lowering it by a small percentage.
References

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Anderson, P.L., McLellan, R.D., Overton, J.P. and Wolfram, G.L., 2012. Price elasticity of
demand. McKinac Center for Public Policy. Accessed October, 13, p.2010.
Norman, G., 2014. Price Elasticity of Supply. In Dictionary of Industrial Organization. Edward
Elgar Publishing Limited, 95(2), pp.334-339.