Question

B - determine the cases of demand and supply elasticity by using graphics and formula laws؟

please answert as following steps

how that important ( key words)

solutions

how we are using ( how it is important)

thanks

Answer 1

The graph is as below:

DD1 is the demand curve which is slopped downward. It is so because there is an inverse relationship between price and quantity.

Price elasticity is calculated in different points on the demand curve.

How important:

This is important for understanding market sensitivity. Elasticity gives idea how the consumer responses to a price change – suppose if the price changes on the elastic part of the demand then consumer responses would be high.

Solutions:

The best solution is not to change price if the elasticity of demand is elastic or infinity – if price increases on the elastic part then quantity demanded would fall drastically and this reduces revenue earnings of the firm.

If the elasticity of demand is inelastic or 0, a price change is advisable – if price increases there, quantity demanded would not fall much, leading to the higher revenue earnings.

If the elasticity of demand is equal to 1, a price change would give equal impact; therefore, there would be no such gain or loss.

How to use:

This is the graphical approach of price elasticity of demand (Ep).

PD of a particular point on the demand curve = Distance below that point / Distance above that point

D is the point where Ep is infinity, because distance above that point is 0 and it becomes the denominator.

Any point between D and C is elastic (Ep > 1), since “distance below that point” is higher than “distance above that point”.

Any point between C and D1 is elastic (Ep < 1), since “distance below that point” is lower than “distance above that point”.

C is the point where both “distance below that point” and “distance above that point” are equal.

D1 is the point where Ep is 0, because distance below that point is 0 and it becomes the numerator.

The initial task is to find where the demand is precisely and then the decision of price change should be taken.