ECO400-BESemester: Spring

Assignment No. 1

Hafiz M Rashid SaeedReg.No :CIIT/SP15-EMBA-004/CVC

Program : EMBAMail :sp15emba004@vcomsats.edu.pk

Cell No. 03006751381

Q No.1If a demand curve is elastic, total revenue falls when the price rises discuss it in detail.

Ans:Price Elasticity of Demand:

Price Elasticity of Demand means that there is a relationship between price andquantity demanded and both they are inversely related. Moreover, we also say that it is ameasure of the responsiveness of quantity demanded to change in price.

Formula for Calculating Price Elasticity of Demand:

Percentage Change in Quantity DemandedPrice Elasticity of Demand =

Percentage Change in Price

{(Q2 - Q1) / Q1} *100=

{(P2 - P1) / P1} *100Example:

If a price of Pizza changes from Rs.20 to Rs.22 and quantity of demand falls from100 to 50 then elasticity of demand is calculated as

{(100-50)/100} *100 50 %PED = = = -5 = 5 = 5

{(20-22)/20} *100 -10 %

Price

BP2 Rs.22

AP1 Rs.20

.

0 50 100 Quantity of DemandQ2 Q1

Total Revenue:It means the total amount which collect sellers from buyers as the price of

their sold goods.Total Revenue = Price * Quantity

The Relationship of Elastic Demand and Total Revenue:We can discus this relation by knowing their effect on each other. After

seeing the specific impact, we learned that if demand is elastic, the percentage change inquantity demanded is greater than the percentage change in price. We observe that, if theprice of Pizza rises, its quantity demanded also falls that has a direct effect on its totalrevenue.Now we can say that in an Elastic Demand situation, the change in Price may cause thechange in quantity demanded, total sale, and total revenue.Thus it is true that, if demand is elastic, total revenue falls because of increasing theprice.

IfED:P (Price Falls) TR (Total Revenue Rises)

But When

ED: P (Price Rises) TR (Total Revenue Falls)

Graphical illustration of Elasticity of Demandand Total Revenue:

Here in the graph, we can see tow points A and B. Demand is elasticbetween these two points. When the price Rs.20 is less than Rs.22, the quantity demandedis 100 pizzas which is greater than 50 pizzas. It results in to increase in total revenue.As

Total Revenue =Price * Quantity = 20 * 100 = Rs. 2000

Thus, in elastic demand total revenue increases when pricedecreases because of the increase in quantity demanded .But

When in the same elastic demand situation, the price rises from Rs.20 to Rs.22,the quantity demanded reaches from 100 pizzas to 50 pizzas. This thing not only affectson quantity demanded but also also disturbs or changes the amount of total revenue thatdecreases as well.

Total Revenue =Price * Quantity = 22 * 50 = Rs. 1100

Thus, it is proved that in elastic demand, total revenue falls whenprice rises because of the decrease in quantity demanded.

Price

BP2 Rs.22

AP1 Rs.20

.

0 50 100 Quantity of DemandO Q2 Q1

TR of OP1AQ1= 20*100= Rs.2000

TR of OP2BQ2= 22*50= Rs.1100

Q No.2 :In most markets, supply is more elastic in the long run than in the shortrun, why?

Ans:

Price Elasticity of Supply:It shows that there is positive relationship between price and quantity

supplied. Moreover, we also say that it is a measure of the responsiveness of quantitysupplied to change in price.

Formula for Calculating Price Elasticity of Supply:

Percentage Change in Quantity SuppliedPrice Elasticity of Supply =

Percentage Change in Price

{(S2 - S1) / S1} *100=

{(P2 - P1) / P1} *100

Long Run Supply:A time period in which all factors of production and costs are variable.

In the long run, firms are able to adjust all costs.

Short Run Supply:It means that within a certain future period of time, at least one input

is fixed while others are variable. The short run is not a definite period of time, but rathervaries based on the length of the firm's contracts.

The Cause of Elasticity of Supply is More inThe Long Run Than in The Short Run:

In short run, firms use their full sources and facilities for improvingtheir capacities, pay extra wages to workers for making overtime work or hire additionallabor to increase their output.On the other hand, only in long run, firms can build new factories or close the existingones or some can enter and others can exit. That is why in the long run, firms can be ableto change their output much more in the long run.

It shows that in elasticity of supply, time also has a significance because during a shorterperiod of time, it would be more costly for seller to bring forth and release products.For example, farmers may be motivated to grow more wheat because of higher wheatprice in the market and there big changes can not take place until the next growing seasonstarts. Soon after the harvest season, the wheat supply will relatively be inelastic but afterthis, during a longer time period that extends to the next growing period or season, thesupply will be much more elastic.Thus we can say that supply will be more elastic in the long runthan in the short run.As shown in the graph

QSRPrice

QLRP2

P1

.

0 Q1 QSR QLR Quantity of Supply