Elasticity of Demand

1. Elasticity of demand is the sensitivity of the customers to the change in price of a product.

2. The degree of elasticity of demand is measured by the coefficient Ed which is

Percentage Change in Quantity Demanded/Percentage Change in Price

Percentage Change in Price = Change in Price/Original Proce * 100

a. If %change in Price is < %change in Quantity Demanded = Elastic

b. If %change in Price is = infinite change in Quantity demanded = Perfectly Elastic

c. If %change in Price is > %change in Quantity Demanded = Inelastic

d. If %change in Price is = 0 Change in Quantity Demanded = Perfectly Inelastic

e. If %change in Price is = %change in Quantity Demanded = Unit Elasticity

Total Revnue = Unit Price * Quantity Sold.

1.If Price and Total Revenue Change inversely = Elastic

2.If Price and Total Revenue Change Directly =

. . .

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(an increase in supply decreases the price. There are a large number of firms

2. Under perfect competition the firms demand curve is perfectly elastic

Under perfect competition AR=MR=P=D always. MP is the change in TP associated with the additional unit of variable resource. The law of diminishing returns states that as the variable resources is added to a fixed amount of other resources the resulting total product will eventually increase at diminishing amounts, reach a maximum and then decline. An individual seller does not have any influence on the market price

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