Chapter -2 Demand and supply analysis.docx

8/18/2019 Chapter -2 Demand and supply analysis.docx

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Course Name: Microeconomics

Chapter note

Prepared by SM Nahidul Islam

Dept. of Finance & Banin!

Islamic "ni#ersity$ %ushtia.

uestions at a !lance:

1. What do you mean by demand? state the law of demand

2. What is Demand Schedule and demand curve?

3. Describe Market demand.

4. Describe the factors or determinants of demand curve or Factors that cause shift in the

demand curve.

5. Why does demand curve slop downward from left to the right.

6. Define supply & state the low of supply7. Describe the factors or determinants of supply curve or Factors that cause shift in the supply

curve.

8. Describe the shifts in both demand and supply

9. !plain why a situation of e!cess demand will result in an increase in the market price. Why

will a situation of e!cess supply result in a decrease in the market price?

10. Define elasticity & elasticity of demand & Why conomists "se lasticity

11. Define price elasticity of demand & state the different types of elasticity of demand

12. Factors influencing the price elasticity of demand

13. Describe the income elasticity of demand

14. Define cross price elasticity of demand & what does the sign of the cross#price elasticity of

demand between two goods tell us about the nature of the relationship between those goods?15. What are the differences between elastic demand and inelastic demand?

16. !plain why the price elasticity of demand varies along a linear demand curve.

17. Describe the $rc elasticity measure.

18. Describe the price elasticity of supply & what factors affect the elasticity of supply?

19. What do you mean by perfectly elastic supply and perfectly inelastic supply?

20. !plain why a good with a positive price elasticity of demand must violate the law of demand.

'


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SM Nahidul IslamDept. of Finance & Banking (2nd batch)

1. What do you mean by demand? state the law of demand

)ns*er: he demand fo! a good o! se!"ice is defined to be the !elationship that e#ists bet$een the p!iceof the good and the %uantit demanded in a gi"en time pe!iod' ceteris paribus. "e!bod has a lot of desi!es. ll desi!es a!e not demand. n desi!e ma change into demand afte! completion the basic th!ee

conditions. Desi!e

bilit to pa

*illingness to pa

In addition to abo"e t!ee conditions othe! facto! a!e necessa! to define the concept of demand $hose a!e+ ,!ice

,lace

,e!iod

In absence of an abo"e condition desi!e ma not be a demand.

In the econom o"e! a pe!iod of time othe! things (taste' habit' income' p!ices of complement'

population' !ate of inte!est on highe! pu!chase etc) !emain constant if p!ice inc!ease of good -' demanddec!eases' if p!ice dec!eases demand inc!eases of good -. his in"e!se !elationship sho$s the la$ of demand.

2. What is Demand !hedule and demand !u"#e?

)ns*er: abula! !ep!esentation of the !elationship bet$een p!ice and demand is called demand schedule.It indicates that $hen ,!ice of goods - inc!eases than Demand dec!eases and $hen ,!ice dec!eases thanDemand of goods - inc!eases.

Fi!ure: Demand Schedule

Demand Cur#e is the g!aphical !ep!esentation of demand schedule. he demand cu!"e simplsho$s ho$ the %uantit pu!chased "a!ies $ith the "a!iation in p!ice.

Islamic University, Kushtia 2


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3. Des!"ibe $a"%et demand.

)ns*er: he ma!ket demand consists of the total %uantit demanded b each indi"idual in the ma!ket.onceptuall' the ma!ket demand cu!"e is fo!med b computing the ho!i/ontal summation of theindi"idual demand cu!"es fo! all consume!s. he follo$ing diag!am illust!ates a simple case in $hich

the!e a!e onl t$o consume!s' ,e!son and ,e!son B. Notice that the total %uantit demanded in thema!ket is 0ust the sum of the %uantities demanded b each indi"idual. In this diag!am' ,e!son $ished to bu 1 of this commodit and pe!son B $ishes to bu 13 units $hen the p!ice is 45. hus' at a p!ice of 45'the total %uantit demanded in the ma!ket is 23 (61713) units of this commodit.

4. Des!"ibe the fa!to"s o" dete"minants of demand !u"#e o" &a!to"s that !ause shift in the

demand !u"#e.

)ns*er+ he facto!s that cause shift in the demand cu!"e a!e gi"en belo$+

+. Price of !oods: p!ice is the most impo!tant dete!minate fo! changing demand of goods. If p!ice

inc!ease the demand falls but if the p!ice dec!ease then the demand inc!ease.



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(. ,he price of related !oods: 8oods ma be !elated in consumption as eithe! 9

Substitute goods

omplementa! goods

Substitute !oods: !ise in the p!ice of substitute goods inc!eases the demand fo! the othe! goods and

shifting the demand cu!"e to the !ight. Fo! an e#ample is coffee and tea.

bo"e the diag!am illust!ates the effect of an inc!ease in the p!ice of coffee. highe! p!ice ofcoffee !educes the %uantit of coffee demanded' but inc!eases the demand fo! tea.

Complementary !oods: !ise in the p!ice of complementa! goods dec!eases the demand fo! othe!

goods and shifting the demand cu!"e to the left. Fo! an e#ample is D:Ds and D:D plae!s.

bo"e the diag!am illust!ates the effect of an inc!ease in the p!ice of D:Ds. Note that an inc!ease in the p!ice of D:Ds $ould !educe both the %uantit of D:Ds demanded and the demand fo! D:D plae!s.

-. Consumers Income: n inc!eases in income $ill; Inc!ease demand (Shift the cu!"e !ight$a!d) fo! a no!mal good.

Dec!ease demand (Shift the cu!"e left$a!d) fo! an infe!io! good.



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. Consumers taste$ habits and preferences: onsume!s p!efe!ences tastes and habits change thedemand.#ample+ onsume!s habits of taking tea. So then inc!ease the demand of suga! and milk.

/. ,he number of consumers: onsume!s of a count! is the main ma!ket fo! the economicinstitution. So the numbe! of consume!s inc!ease then the demand of goods $ill inc!ease.

0. 12pectations of future prices: n e#pectation that p!ice $ill !ise o! fall in the futu!e shifts thecu!!ent demand cu!"e !ight$a!d of left$a!d.

5. Why does demand !u"#e slo' downwa"d f"om left to the "i(ht.

)ns*er: Demand cu!"e slopes do$n$a!d f!om left to !ight fo! the follo$ing !easons+

+. 3o* of diminishin! mar!inal utility: cco!ding to this la$ the amount of good consumedinc!eases' the ma!ginal utilit of that good tends to diminish fo! this in"e!se !elationship bet$eenconsumption and ma!ginal utilit' demand cu!"e slope do$n$a!d to the !ight.

(. 3a* of demand+ cco!ding to this la$ if p!ice inc!eases of goods demand dec!eases' p!ice

dec!eases demand inc!eases of goods. Fo! this in"e!se !elationship bet$een p!ice and demand'demand cu!"e slopes do$n$a!d to the !ight.

-. Substitute effect: $hen the p!ices of a good inc!eased' the consume! $ill substitute othe! simila! goods fo! it. In this cases' the demand of that goods dec!eases and the demand cu!"e slopedo$n$a!d.

. Income effect: consume! pu!chases goods and se!"ices at "a!ious le"els of incomes. If the p!iceof the goods and se!"ices inc!eases then the !eal income of consume! dec!eases. lso' if the p!icedec!eases then the !eal income inc!eases. It is called income effect.

6. Define su''ly ) state the low of su''ly

)ns*er: Suppl is the !elationship that e#ists bet$een the p!ice of a good and the %uantit supplied ina gi"en time pe!iod' cete!is pa!ibus. Fo! e#ample ; In 215


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(. ,echnolo!y and producti#ity: echnological imp!o"ements and changes that inc!ease the p!oducti"it of labo! !esult in lo$e! p!oduction costs and highe! p!ofitabilit. Suppl inc!eases in!esponse to this inc!ease in the p!ofitabilit of p!oduction as illust!ated belo$;

-. ,he e2pectations of producers: s in the case of demand' e#pectations can pla an impo!tant!ole in suppl decisions. If' fo! e#ample' the e#pected futu!e p!ice of a gasoline !ises' !efine!s madecide to suppl less toda so that the can stockpile gas fo! sale at a late! date. on"e!sel' if thee#pected futu!e p!ice of a good falls' cu!!ent suppl $ill inc!ease as selle!s t! to sell mo!e toda befo!e the p!ice declines.

. ,he number of producers: n inc!ease in the numbe! of p!oduce!s !esults in an inc!ease (a!ight$a!d shift) in the ma!ket suppl cu!"e as illust!ated belo$;



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/. ,he prices of related !oods and ser#ices: he suppl decision fo! a pa!ticula! good is affected

not onl b the p!ice of the good' but also b the p!ice of othe! goods and se!"ices the fi!m ma

p!oduce. Fo! e#ample' an inc!ease in the p!ice of co!n ma induce a fa!me! to !educe the suppl of

$heat. In this case' an inc!ease in the p!ice of one p!oduct (co!n) !educes the suppl of anothe!

p!oduct ($heat).

8. Des!"ibe the shifts in both demand and su''ly

)ns*er: >et?s e#amine $hat happens if demand o! suppl changes. Fi!st' let?s conside! the effect of an

inc!ease in demand. s the diag!am belo$ indicates' an inc!ease in demand !esults in an inc!ease in the

e%uilib!ium le"els of both p!ice and %uantit.

dec!ease in demand !esults in a dec!ease in the e%uilib!ium le"els of p!ice and %uantit as illust!ated

belo$ ;

n inc!ease in suppl !esults in a highe! e%uilib!ium %uantit and a lo$e! e%uilib!ium p!ice.



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%uilib!ium %uantit $ill fall and e%uilib!ium p!ice $ill !ise if suppl falls as illust!ated belo$ ;

9. *+'lain why a situation of e+!ess demand will "esult in an in!"ease in the ma"%et '"i!e.

Why will a situation of e+!ess su''ly "esult in a de!"ease in the ma"%et '"i!e?

)ns*er+ #cess demand occu!s $hen p!ice falls belo$ the e%uilib!ium p!ice. In this situation' consume!s

a!e demanding a highe! %uantit than is being made a"ailable b supplie!s. his c!eates p!essu!e fo! the

p!ice to inc!ease 9 selle!s can ask fo! highe! p!ices and still find bue!s' and bue!s offe! highe! p!ices to

secu!e the units the $ant. s the p!ice inc!eases' %uantit demanded $ill fall as %uantit supplied

inc!eases !etu!ning the ma!ket to e%uilib!ium.

#cess suppl occu!s $hen p!ice is abo"e the e%uilib!ium p!ice. Supplie!s ha"e made a"ailable

mo!e units than consume!s a!e $illing to pu!chase at the high p!ice. his c!eates p!essu!e fo! the p!ice to

dec!ease 9 bue!s can get a$a $ith paing less because selle!s a!e happ to find a bue! at all' and

selle!s a!e $illing to sell fo! less $anting to make su!e the find a bue!. s the p!ice dec!eases' the

%uantit demanded $ill go up $hile at the same time the %uantit supplied $ill dec!ease' !etu!ning the

ma!ket to e%uilib!ium.



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10. Define elasti!ity ) elasti!ity of demand ) Why *!onomists ,se *lasti!ity

)ns*er+ lasticit is a measu!e of the deg!ee of sensiti"it (o! !esponsi"eness) of one "a!iable to changes

in anothe! "a!iable. In othe! $o!ds' it is the measu!ement of the pe!centage change in one "a!iable that

!esults f!om a 1@ change in anothe! "a!iable.

lasticit of demand means the !esponsi"eness demand due to the change in p!ice' income and

p!ice of othe!s good.

1conomists use elasticity for the follo*in! reasons '

a. n elasticit is a unit;f!ee measu!e.

b. B compa!ing ma!kets using elasticities it does not matte! ho$ $e measu!e the p!ice o! the

%uantit in the t$o ma!kets.

c. lasticities allo$ economists to %uantif the diffe!ences among ma!kets $ithout standa!di/ing the

units of measu!ement

11. Define '"i!e elasti!ity of demand ) state the diffe"ent ty'es of elasti!ity of demand

)ns*er: ,!ice elasticit of demand is the measu!e of sensiti"it of %uantit demanded to a change in the

p!ice of a good. Notice that p!ice elasticit of demand $ill al$as be e#p!essed as positi"e numbe! (since

the absolute "alue of a negati"e numbe! is al$as positi"e). he p!ice elasticit of demand' defined as+

p!ice elasticit of demand (d) 6

Different types of price elasticity of demand are !i#en belo*:

4alue of price elasticity

of demand

Classification Meanin!

,e!fectl inelastic demand Auantit demanded is completel insensiti"e to p!ice.

bet$een and ;1 Inelastic demand Auantit demanded is !elati"el insensiti"e to p!ice.

;1


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)ns*er: he p!ice elasticit of demand fo! a pa!ticula! demand cu!"e is influenced b the follo$ing

facto!s++. )#ailability of substitutes+ the g!eate! the numbe! of substitute p!oducts' the g!eate! the elasticit.(. De!ree of necessity or lu2ury: lu#u! p!oducts tend to ha"e g!eate! elasticit than necessities.

Some p!oducts that initiall ha"e a lo$ deg!ee of necessit a!e habit fo!ming and can become

Cnecessities to some consume!s.-. Proportion of income re5uired by the item: p!oducts !e%ui!ing a la!ge! po!tion of the

consume!Es income tend to ha"e g!eate! elasticit.. ,ime period considered: elasticit tends to be g!eate! o"e! the long !un because consume!s ha"e

mo!e time to ad0ust thei! beha"io! to p!ice changes./. Permanent or temporary price chan!e+ a one;da sale $ill !esult in a diffe!ent !esponse than a

pe!manent p!ice dec!ease of the same magnitude.0. Price points: dec!easing the p!ice f!om 42. to 41. ma !esult in g!eate! inc!ease in %uantit

demanded than dec!easing it f!om 41. to 41.G.

13. Des!"ibe the in!ome elasti!ity of demand

)ns*er: he elasticit of demand $ith !espect to a consume!Es income is called the income elasticit.

he income elasticit of demand' defined as+

a. *hen the income elasticit of demand is positi"e (no!mal good)' consume!s inc!ease thei!

pu!chases of the good as thei! incomes !ise (e.g. automobiles' clothing).b. *hen the income elasticit of demand is g!eate! than 1 (lu#u! good)' consume!s inc!ease thei!

pu!chases of the good mo!e than p!opo!tionate to the income inc!ease (e.g. ski "acations).c. *hen the income elasticit of demand is negati"e (infe!io! good)' consume!s !educe thei!

pu!chases of the good as thei! incomes !ise (e.g. potatoes).

For e2ample:

• Hed 6 ; .+ 8ood is an infe!io! good but inelastic J a !ise in income of 5@ $ould lead to demand

falling b 1.G@.

• Hed 6 7 .K+ 8ood is a no!mal good but inelastic J a !ise in incomes of 5@ $ould lead to

demand !ising b 1.2@.

• Hed 6 7 1.+ 8ood is a no!mal good and elastic J a !ise in incomes of 5@ $ould lead to demand

!ising b K.G@ .

• Hed 6 ; 2.1+ 8ood is in infe!io! good and elastic J a !ise in incomes of 5@ $ould lead to a fall in

demand of .5@



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14. Define !"oss '"i!e elasti!ity of demand ) what does the si(n of the !"oss-'"i!e elasti!ity

of demand between two (oods tell us about the natu"e of the "elationshi' between those

(oods?

)ns*er: he c!oss;p!ice elasticit of demand is a measu!e of the !esponsi"eness of a change in the p!ice

of a good to a change in the p!ice of some othe! good. he c!oss;p!ice elasticit of demand bet$een thegoods % and k can be e#p!essed as+

Notice that this c!oss;p!ice elasticit measu!e does not ha"e an absolute "alue sign a!ound it. In fact' itcan be positi"e o! negati"e.

*hen the c!oss;p!ice elasticit is positi"e $e ha"e

@ @

$

&

' (

∆ >∆

ithe! a) both $

'

and & (

inc!eased o! b) the both dec!eased. Since the a!e mo"ing in the samedi!ection' the p!oduct must be substitutes. ake coffee and tea fo! e#ampleL if the p!ice of tea inc!eases'the %uantit of coffee demanded $ill inc!ease.

*hen the c!oss;p!ice elasticit is negati"e' $

'

and & (

a!e mo"ing in the opposite di!ection'impling the p!oducts a!e complements. ake coffee and c!eam fo! e#ampleL if the p!ice of c!eam

inc!eases' the %uantit of coffee demanded $ill dec!ease.15. What a"e the diffe"en!es between elasti! demand and inelasti! demand?

)ns*er: he main diffe!ences bet$een an elastic demand and an inelastic demand ha"e been

e#plained in details as follo$s+

,opics 1lastic Demand Inelastic Demand

Definition *hen a small change in p!ice b!ings

about mo!e than p!opo!tionate

change in demand' it is kno$n as the

elastic demand.

*hen a big change in p!ice b!ings about less

than p!opo!tionate change in demand' it is

kno$n as inelastic demand.

u!"e he demand cu!"e is flatte! he demand cu!"e is steepe!

elated >u#u!ies and comfo!ts ha"e elastic

demand.

Necessa! items can be te!med as inelastic

demand

Found ,e!fectl elasticit of demand is not

p!actical' $hile !elati"e elasticit is

seen I case of mode!atel p!iced

goods.

,e!fectl inelasticit of demand is seen in the

demand of necessa! goods' $hile !elati"e

inelasticit is seen in case of "e! e#pensi"e

goods.

oefficient he coefficient of elasticit of he coefficient of elasticit of demand is less



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demand is g!eate! than 1' than it

d1

than 1' than it dO1.

#ample #ample of elastic demand a!e colo!

.:. sets p!estige goods' etc.

#ample of inelastic demand a!e salt' !ice'

food g!ains' etc.

16. *+'lain why the '"i!e elasti!ity of demand #a"ies alon( a linea" demand !u"#e.

)ns*er: $e can note that elasticit declines continuousl along a linea! demand cu!"e. he top po!tion of the demand cu!"e $ill be highl elastic and the bottom is highl inelastic. In bet$een'

elasticit g!aduall becomes smalle! as p!ice declines and %uantit !ises. t some point' demand

changes f!om being elastic to inelastic. he point at $hich that occu!s' of cou!se' is the point at $hich

demand is unit elastic. his !elationship is illust!ated in the diag!am belo$.

17. Des!"ibe the "! elasti!ity measu"e.

)ns*er: !c elasticit measu!e means $hen elasticit is calculated bet$een t$o points on the same

demand cu!"e. Suppose that $e $ish to measu!e the elasticit of demand in the inte!"al bet$een a

p!ice of 4K and a p!ice of 43. In this case' if $e sta!t at 4K and inc!ease to 43' p!ice has inc!eased b

23@. If $e sta!t at 43 and mo"e to 4K' ho$e"e!' p!ice has fallen b 2@. *hich pe!centage change

should be used to !ep!esent a change bet$een 4K and 43P


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>et?s conside! an e#ample. Suppose that %uantit demanded falls f!om to K $hen the p!ice !isesf!om 45 to 43. he a!c elasticit measu!e is gi"en b+

In this inte!"al' demand is inelastic (since d O 1).

18. Des!"ibe the '"i!e elasti!ity of su''ly ) what fa!to"s affe!t the elasti!ity of su''ly?

)ns*er: he p!ice elasticit of suppl is the measu!e of the !esponsi"eness in %uantit supplied to achange in p!ice fo! a specific good. he p!ice elasticit of suppl is defined as+

Factors affectin! the elasticity of supply:

+. ,ime: In the sho!t !un fi!ms $ill onl be able to inc!ease input of labou! to inc!ease suppl of

commodities ma not be able to inc!ease the suppl in !esponse to the p!ice change but the suppl

change $ill be little because othe! facto!s of p!oduction ma not be inc!eased in the same

p!opo!tion and ma limit the suppl. Qo$e"e!' in the long !un a fi!m $ill inc!ease the input of all

facto!s of p!oduction and thus the suppl becomes mo!e p!ice elastic.

(. )#ailability of resources: If the econom al!ead using most of its sca!ce !esou!ces then fi!ms

$ill find it difficult to emplo mo!e and so output $ill not be able to !ise. he suppl of most of

goods and se!"ices $ill the!efo!e be p!ice inelastic.

-. Number of producers: Mo!e p!oduce!s mean that the output can be inc!eased mo!e easil. hus

suppl is mo!e elastic.



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. 1ase of storin! stocs: If goods can be stocked $ith ease and ha"e a long shelf life' the suppl

$ill be elastic' othe!$ise inelastic.

/. Increase in cost of production as compared to output: In cases $he!e the!e is a significant

inc!ease in cost of p!oduction $hen output is inc!eased' suppl is inelastic. his is because

supplie!s $ill ha"e to ha"e to do a significant in"estment in o!de! to inc!ease the output. It $illtake time and some supplie!s ma be hesitant in doing so.

0. Impro#ement in ,echnolo!y: In indust!ies $he!e the!e is a !apid imp!o"ement in technolog' the

,S of such goods $ill be mo!e elastic as compa!ed to indust!ies $he!e the!e is not much

imp!o"ement in technolog.

6. Stoc of finished !oods: In indust!ies $he!e the!e a!e high in"ento!iesRstocks of finished goods'

the supplie!s can easil suppl mo!e as the p!ice !ises. hus' the ,S fo! these goods $ill be

elastic.

19. What do you mean by 'e"fe!tly elasti! su''ly and 'e"fe!tly inelasti! su''ly?

)ns*er: pe!fectl elastic suppl cu!"e is ho!i/ontal (as illust!ated in the diag!am belo$). he supplcu!"e facing a single bue! in a ma!ket in $hich the!e a!e a "e! la!ge numbe! of bue!s and selle!s islikel to appea! to be pe!fectl elastic (o! close to this' an$a). his $ill occu! $hen each bue! is ap!ice;take! $ho has no effect on the ma!ket p!ice.

pe!fectl inelastic suppl cu!"e is "e!tical (as in the diag!am belo$). he p!ice elasticit of

suppl is /e!o $hen suppl is pe!fectl inelastic.



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20. *+'lain why a (ood with a 'ositi#e '"i!e elasti!ity of demand must #iolate the law of

demand.

)ns*er: he la$ of demand states that' holding othe! facto!s fi#ed' the!e is an in"e!se !elationship

bet$een p!ice and %uantit demanded' i.e. that an inc!ease in p!ice dec!eases %uantit and "ice "e!sa. If a

good has a positi"e p!ice elasticit of demand' it must be that an inc!ease in the p!ice of that good leads to

an inc!ease in the %uantit demanded. he!efo!e' such a good "iolates the la$ of demand.

+. ) +7 percent increase in the price of automobiles reduces the 5uantity of automobiles demanded

by 8 percent. 9hat is the price elasticity of demand for automobiles

)ns*er:

G2.212

G

@

@

' −=

−=

∆

∆=

(

'

( 'ε

(. ) linear demand cur#e has the e5uation / ; /7 < +77 . 9hat is the choe price

)ns*er:

he choke p!ice is the p!ice $he!e

2='

.


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Deman!

"l#$e % & 2

5

10

'

(


Answer:

When the $rice #) nuts *#es u$, the +eer uantity emane )alls )#r all levels #) $rice-eman shi)ts le)t./ eer an nuts are eman c#m$lements/

a. *hen income !ises' %uantit demanded inc!eases fo! all le"els of p!ice (demand shifts

!ight$a!d).b. No$+ 'd 6 T U 2 ( U 1 7 .1V1' 6 1' 9 2, ⇒ , 6 G 9 .3 Ad

c.

A

,

G22

1I22

K. Suppose the demand curve in a particular market is given by Q = 5 − 0.5P.

a) lot this curve in a graph.

b) At what price will demand be unitary elastic!

Answer:

a he in"e!se demand function is , 6 1 9 2A

d. *e kno$ that the "alue of the p!ice elasticit of demand is gi"en b

fo! a linea! demand function+ A 6 a 9 b,' then

'b

(

∆= −

∆

and

'

( b

'

(

(

' ( ' −=

∆

∆='ε



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Qe!e' 9b 6 91R2. Fo! demand to be unita! elastic it must be that

13

2

21 −=

−−

(

(

$hich implies that ( 6 3.

3. ,he demand and supply cur#es for coffee are !i#en by /d ; 077 < ( and /s ; -77 > .

a@ Plot the supply and demand cur#es on a !raph and sho* *here the e5uilibrium occurs.

b@ "sin! al!ebra$ determine the maret e5uilibrium price and 5uantity of coffee.

)ns*er:

a

,

A

522

522

32

322 I22

D

S

e.

( (

( (

==

+=−

3I5

K52I

,lugging3= (

back into eithe! the suppl o! demand e%uation ields

322='

.

. Suppose that demand "or bagels in the local store is given by e#uation Qd = $00

% &00P. 'n this e#uation( P denotes the price o" one bagel in dollars.

a@ Fill in the follo*in! table: 0.&0 0.5 0.50 0.55 *.50

+d

$P

b) At what price is demand inelastic!

c) At what price is demand elastic!



18/19


Answer:

P 0/10 0/45 0/50 0/55 *.50

Qd 290 255 250 245 50

εQ,P ,0.0$5 ,0.&- ,0.* ,0.**5 ,5

*e can find elasticities of demand using the follo$ing fo!mula

' 1

5 1 5ε

∆= = − × =

∆ − × −

d

' ( d

' ( ( (

( ( ( '

.

his demand cu!"e is linea!. he in"e!se demand function is , 6 5 9 1R1 Ad

Wbse!"e that fo! p!ice 41.3 the elasticit of demand is e%ual to

'

1.31

1.3 5' ( ε = = −

−

.

Fo! all p!ices belo$ 41.3' the demand is inelastic' $hile fo! all p!ices abo"e 41.3' the demand is elastic.

T. Consider a linear demand cur#e$ / ; -/7 < 6 .

a. Deri#e the in#erse demand cur#e correspondin! to this demand cur#e.

b. 9hat is the choe price

c. 9hat is the price elasticity of demand at ; /7

Answer:



19/19


a)

' (

' (

( '

T13

53T

T53

−=

−=

−=

b) he choke p!ice occu!s at the point $he!e

2='

. Setting

2='

in the in"e!se demand e%uation

abo"e ields3= (

.

d. t3= (

' the choke p!ice' the elasticit $ill app!oach negati"e infinit.

Islamic University Kushtia 19

Chapter -2 Demand and supply analysis.docx

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