ECN 201: Principles of Microeconomics Nusrat Jahan Lecture-3
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ECN 201: Principles of Microeconomics Nusrat Jahan Lecture-3 Elasticity
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ECN 201: Principles of Microeconomics Nusrat Jahan Lecture-3. Elasticity. Price elasticity of demand shows the percentage change in quantity demanded due to percentage change in price. The demand for a good is said to be – Price Elastic if E d >1 Price Inelastic if E d
Transcript of ECN 201: Principles of Microeconomics Nusrat Jahan Lecture-3
ECN 201: Principles of MicroeconomicsNusrat Jahan
Lecture-3
Elasticity
Price elasticity of demand shows the percentage change in quantity demanded due to percentage change in price.
The demand for a good is said to be –Price Elastic if Ed>1Price Inelastic if Ed<1Unit Elastic if Ed=1
Perfectly elastic demand: The demand for a good is perfectly elastic if the price elasticity of demand is infinite. In this case the demand curve becomes horizontal.
Perfectly inelastic demand: The demand for a good is perfectly inelastic if the price elasticity of demand is zero. In this case the demand curve becomes vertical.
Elastic Demand and Inelastic Demand
Price elasticity of demand and total revenue
The total revenue from the sale of a good equals the price of the good multiplied by the quantity sold.
When a price changes, total revenue also changes. But a cut in the price does not always decrease total revenue. The change in total revenue depends on the elasticity of demand in the following way: If demand is elastic, a 1 percent price cut increases the quantity sold by
more than 1 percent and total revenue increases.
If demand is inelastic, a 1 percent price cut increases the quantity sold by less than 1 percent and total revenue decreases.
If demand is unit elastic, a 1 percent price cut increases the quantity sold by 1 percent and total revenue does not change.
Cross price elasticityThe cross elasticity of demand is a measure of the responsiveness of the demand for a good to a change in the price of a substitute or complement, other things remaining the same.
Substitute Goods: Cross Elasticity is Positive Complements: Cross Elasticity is Negative
Income elasticity of demandPercentage change in quantity demanded due to percentage change in income.
Normal Good: When income elasticity of demand is positive the good is a Normal good.Inferior Good: When income elasticity of demand is negative the good is an Inferior good.Necessities: Goods which are income inelastic are necessities.Luxuries: Goods which are income elastic are Luxuries.
