Price Elasticity

-
Price Elasticity:-It measures the sensitivity of the quantity demanded or the quantity supplied to the change in the price. In other words, how much will a change in price affect the quantity demanded or supplied?

 Price elasticity is calculated by taking the percentage change in quantity divided by the percentage change in price. On a linear supply or demand curve (a straight line), you can use the following price elasticity formulas:

 Ep = (% Change Q) / (% Change P)
Ep = ((Change in Q) / (Q1)) / ((Change in P) / (P1))
Ep = ((Q2 - Q1) / (Q1)) / ((P2 - P1) / (P1))
     Or dQ/dP *P/Q 

 Note that while price elasticity is related to the slope of the line, it is not actually the slope of the line. Recall that the slope of the line is calculated by "rise over run," or the change in the y-axis divided by the change in the x-axis. Price elasticity is calculated by "run over rise," or the change in quantity (on the x-axis) divided by the change in price (on the y-axis).

 Generally, a curve is elastic if it is flat and more inelastic if it is more verticle. However, this can be a little misleading. Even on a linear (straight) demand or supply curve, the elasticity is not constant for the whole curve. The reason for this is that we are measuring the percentage change in both price and quantity. As you move along a linear curve and approach one of the axes, the percentage changes in that axis variable (either price or quantity) get smaller and smaller and the percentage changes of the opposite axis get bigger and bigger.

 Price elasticity does NOT have a unit attached to it. That is, price elasticity is not measured in dollars or %, it is simply a ratio.

 We should really look at price elasticity in two separate ways: the price elasticity of demand and the price elasticity of supply.

 Price Elasticity of Demand
The first law of demand states that as price increases, less quantity is demanded. This is why the demand curve slopes down to the right. Because price and quantity move in opposite directions on the demand curve, the price elasticity of demand is always negative.
The image below shows the price elasticity of demand at different points along a simple linear demand curve, QD = 8 - P.

 Price Elasticity of Demand:-Let's use the equation above, QD = 8 - P, to calculate the price elasticity of demand.

 Imagine that the price is at 3, then moves up to 5. What is the elasticity?
At a price of 3, the quantity is 5 (Q = 8 - 3) and at a price of 5, the quantity is 3.
Ep = ((Q2 - Q1) / (Q1)) / ((P2 - P1) / (P1))
Ep = ((3 - 5) / (5)) / ((5 - 3) / 3)
Ep = -0.6

 Price Elasticity of Supply:-The typical supply curve is characterized by a line that slopes up to the right. Thus, as the price increases, more quantity is supplied. Because price and quantity move in the same directions on the supply curve, the price elasticity of supply is usually positive.

Comments

Post a Comment

Popular posts from this blog

INDIAN BANKING AND FINANCIAL

-
1.Which one is not the part of Migration to new capital adequacy framework based on the three pillar approach namely? A.Minimum capital requirement B.Supervisory review C.Market discipline D.Book keeping Ans D 2.Which was the first Bank to be established in 1148? A.SBI B.CBI C.Reserve Bank D.Casa De SanGiorgio Ans D 3.Italian money lenders were known as Banechi or Banacheri because A.They had a lot of money B.They had a money bank C.They kept a special type of table to transact their business D.All of the above Ans B 4.Which of the following are the objectives and functions of IDBI? A.To provide technical and administrative assistance for promotion or expansion of industry B.To undertake market and investment research and surveys as also technical and economic studies in connection with development of industry. C.To act as lender of last resort and to finance projects that are in conformity with national priorities D.All of these Ans D 5.Banks can avail ...
Read more

Growth and Development MCQs

-
Image
               Dharmenedra Bansal               1. Which of the following explains the term economic growth? a. Increase in per capita production b. Increase in per capita real income c. structural change in the economy d. all the above are right✔ 2. Economic development is characterized by a. Structural change in the economy b. Change in the occupational structure c. Both a and b✔ d. None of the above 3. Which of the following explains the term economic development? a. Improvement in the technology involved b. Improvement in production c. Improvement in distribution system d. All the above✔ 4. An underdeveloped economy is characterized by a. High per capita real income b. Large proportion of labor force in the tertiary sector c. State of deprivation of large proportion of population✔ d. All the above State of deprivation of large proportion of population Underdevelo...
Read more

STATISTICS MCQs

-
1.A measure of dispersion is always  A) Zero B) Positive✔ C) Negative D) Infinity 2.Which of these is a relative measure of dispersion A) Standard Deviation B) Variance C) Coficient of Variation✔ D) None of these 3.The measure of dispersion is changed by a change of A) Origin B) Scale✔ C) Algebraic Signs D) None 4.Mean Deviation, Variance and Stand-ard Deviation of thevalues 4, 4, 4, 4, 4, 4 is A) 4  B) 8  C) 2  D)0✔ 5.The mean deviation of the values, 18, 12, 15 is A) 6 B) 0 C) 3 D) 2✔ 6.The sum of squares of deviation is least if measure from A) Mean✔ B) Mode C) Median D) Variance 7.The sum of squared deviations of a set of n values from their mean is A) Zero B) Maximum C) Least✔ D) None 8.Variance is always calculated from A) Mean✔ B) Variance C) Geometric Mean D) Median 9.Lowest value of variance can be A) 0✔ B) -1 C) 3 D) -3 10.The variance of a constant is A) Zero✔ B) Constant C) Normal D) None 11.Va...
Read more