Economics Basics Essay

1237 words - 5 pages

What is Effective Demand?Effective Demand in a market is the demand for a product or service which occurs when purchasers are constrained in a different market.That is, Effective Demand is the quantity of a good or service that consmers are actually buying at the current market price.So the effective demand for sports cars, for instance, might be measured by the actual number of sports cars sold at a certain price during a particular period.What is Price Elasticity of Demand?Price elasticity of demand measures the degree of responsiveness of the quantity demanded of a good to a change in its price. It is also defined as:"The ratio of proportionate change in quantity demanded caused by a given proportionate change in price".Formula For Calculation:Price elasticity of demand is calculated by dividing the percentage change in quantity demanded of a good by the percentage change in its price.Ed = Percentage Change in Quantity DemandedPercentage Change in PriceSimple formula for calculating the price elasticity of demand:Ed = %∆Q%∆PHere:Ed stands for price elasticity of demand.Q stands for original quantity.P stands for original price.∆ stands for a small change.
Percentage change in quantity demanded

Percentage change in price

Elasticity

20

10

2

25

50

0.5

28

7

4

3

9

0.333

The table shows a number of calculations of price elasticity. For instance, if an increase in price of 10% leads to a fall in quantity demanded of 20%, then the price elasticity of demand of 20%, then the price elasticity of demand is 2 .If an increase in price of 50 % leads to a fall in quantity demanded of 25 %then price elasticity or demand is 0.5 and so on.Types Of Price Elasticity :

Verbal description of response to a change in price

Numerical measure of elasticity

Elastic

Quantity demanded changes by a larger percentage than does price

>1

Inelastic

Quantity demanded changes by a smaller percentage than does price

<1

Unitary elasticity

Quantity demanded changes by exactly the same percentages as does price

=1

Perfectly Elastic

Buyers are prepared to purchase all they can obtain at some given but none at all at a high price

Infinity

Perfectly Inelastic

Quantity demanded does not change at all as price changes

0

Elastic Demand Curve:Inelastic Demand Curve:What is Production Function?Production of goods requires resources or inputs. These inputs are called factors of production named as land, labor, capital and organization. A rational producer is always interested that he should get the maximum output from the set of resources or inputs available to him. He would like to combine these inputs in a technical efficient manner so that he obtains maximum desired output of goods. The relationship between the inputs and the resulting output is described as production function.A production function shows the relationship between the amounts of factors used and the amount of output generated per period...

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