# Elasticity Of Demand Essay

2520 words - 10 pages

1. (a) Using examples and diagrams, explain the various concepts of elasticity of demand.The law of demand states that if the price of a commodity increases, quantity demanded falls and if the price of the commodity falls, quantity demanded increases. Quantity demanded is the amount that a consumer is willing and able to buy at a given price over a given period of time.Price is not the only factor that determines how much a good, people will buy. Demand can also be affected by the following determinants:tastesnumber and price of substitutes, e.g tea and coffee,number and price of complements goods e.g cars and petrol,incomedistribution of incomeexpectations of future price changesThis relationship between the price of a good and the quantity demanded of the good over a given period of time can be shown graphically as follows:PRICEDPDQ QUANTITY DEMANDEDA demand curve is generally downward sloping from left to right implying that the lower the price the more is a person likely to buy. A demand curve is drawn on the assumption that 'other things remain equal' (in latin words ceteris paribus). In other words it is assumed that none of the determinants of demand mentioned above, other than price changes. The effect of a change in price is simply illustrated by a movement along the demand curve.PRICEDP1PP2DQ1 Q Q2 QUANTITY DEMANDEDWhen one these other determinants change, this will cause a shift in the demand curve that is a new demand curve is drawn. If a change in one of the determinants causes demand to rise for e.g income rises, the demand curve will shift to the right i.e from D to D1 as shown below. On the other hand, if a change in a determinant other than price causes demand to fall, the demand will shift to the left, i.e from D to D2.PRICED1DD2PDQ1 Q Q2 QUANTITY DEMANDEDThe law of demand indicates only direction of change in quantity demanded in response to change in price but elasticity of demand states with how much or to what extent the quantity demanded will change in response to a change in price.Elasticity of demand can be defined as a measure of the responsiveness of quantity demanded to a given change in one of the variables influencing demand. These variables can be price of the good, income of the consumer or the price of related good.If the variable is price, this is measured by the price elasticity of demand. If the variable is the income of the consumer, it is measured by the income elasticity of demand. If the variable is the price of other related goods like substitutes and complements, then it is measured by the cross elasticity of demand. They are related to the concepts of Elasticity of demandPRICE ELASTICITY OF DEMAND (PED)The price elasticity of demand measures the rate of responsiveness in the quantity demanded of a good as a result of a given change in the price of a commodity, all other things remaining constant. The price elasticity of demand is calculated by using the following formula:Price elasticity of demand = % or...

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