Principles of Economics
NATIONAL INSTITUTE OF BUSINESS MANAGEMENT
Assignment on
PRINCIPLES OF ECONOMICS
Master in Business Administration
Q. Suppose the price elasticity of demand for text books is two and the price of the text book is increased by 10%. By how much does the quantity demand fall? Inter the result and discuss reasons for the fall in quantity demand?
INTRODUCTION
Elasticity is the ratio of the percent change in one variable to the percent change in another variable. It is the measure of the responsiveness of quantity demanded to a change in the price level of the product, a product may be perfectly elastic, perfect inelastic and unitary, when a good's elasticity is perfectly inelastic then a change in the price of the product will not change the amount demanded, a perfect elastic product is that which its demand will change by a large magnitude than the change in price. It is a tool for measuring the responsiveness of a function to changes in parameters in a relative way. An "elastic" good is one whose price elasticity of demand has a magnitude greater than one. Price elasticity is an important concept because it tells us how responsive the demand or supply will be to changes in price. If prices rise by 10% will the demand or supply fall or rise by less than 10% or more than 10% . It is important to businesses because it influences their behavior in terms of pricing strategies and the degree of market power they exercise. Some businesses are able to charge different prices for the same product at different times because the degree of elasticity is different. Elasticity has an important influence on the total revenue earned by the firm following changes in price and is therefore very important in analyzing the extent of the impact on a market as a result of a change in demand and supply conditions. We can see this clearly in the case of the increase in petrol duty - there are very few substitutes for
Assignment on
PRINCIPLES OF ECONOMICS
Master in Business Administration
Q. Suppose the price elasticity of demand for text books is two and the price of the text book is increased by 10%. By how much does the quantity demand fall? Inter the result and discuss reasons for the fall in quantity demand?
INTRODUCTION
Elasticity is the ratio of the percent change in one variable to the percent change in another variable. It is the measure of the responsiveness of quantity demanded to a change in the price level of the product, a product may be perfectly elastic, perfect inelastic and unitary, when a good's elasticity is perfectly inelastic then a change in the price of the product will not change the amount demanded, a perfect elastic product is that which its demand will change by a large magnitude than the change in price. It is a tool for measuring the responsiveness of a function to changes in parameters in a relative way. An "elastic" good is one whose price elasticity of demand has a magnitude greater than one. Price elasticity is an important concept because it tells us how responsive the demand or supply will be to changes in price. If prices rise by 10% will the demand or supply fall or rise by less than 10% or more than 10% . It is important to businesses because it influences their behavior in terms of pricing strategies and the degree of market power they exercise. Some businesses are able to charge different prices for the same product at different times because the degree of elasticity is different. Elasticity has an important influence on the total revenue earned by the firm following changes in price and is therefore very important in analyzing the extent of the impact on a market as a result of a change in demand and supply conditions. We can see this clearly in the case of the increase in petrol duty - there are very few substitutes for