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By | May 2013
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Elasticity of Demand
Price Effect,___ Law of Demand, Moment along the demand curve The high the price the lower the quantity demanded.

Non-price Effect ---- Shift Demand to the left and right..
1. Income of the consumer can shift demand to the right or left…. Ie Demand of normal /luxury shift up when there is increase in income Price of inferior shift down when there is increase in income…. 2. Taste/ preference also shift Demand curve

2. Substitutes /complements. If the price of the substitutes increase the demand for other good will go up… complementary goods are the good that are used together.. e.g tooth paste and tooth brush

Advertising ---also shift the demand
Expectation---Demand shift due to expectation … if there will be scarcity of fuel /gasoline, people buy for storage which increase the demand of gas.

An increase in price means an increase in quantity supply. Supply is positively sloped..

Supply has a positive slope when then there is a change (increase) in price while Demand has a negative slope when there is a change (increase) in price..

Quantity demanded is equal to quantity supply

Price effect..
When price is goes up there will be surplus in supply
When price goes down there will be surplus in demand

Price must lower to correct the supply in supply
While an increase in price will correct a shortage in demand ..

Return on Investmet:

NPVa = -cost +cf

Elasticity Obeys the law of demand…

Demand is elastic when the change in demand is high
Demand is inelastic when the change in demand is low
Demand is Unit when the change in demand is indifferent

Ep = price elasticity

Ep =

MC= Additional cost incurred by producing one more unit
MR= Additional revenue generate by producing one more unit


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