EMBA 1ST SEMESTER

BUSINESS ECONOMICS - ECO400

ASSIGNMENT#01

SUBMITTED TO: SAIRA HABIB

SUBMITTED BY: MUHAMMAD USMAN
REG. NO: SP15-EMBA-290
EMAIL : sp15emba290@vcomsats.edu.pk
DATED: 5 APRIL, 2014

Q.1
Elastic Demand
Demand is elastic if a specific percentage change in price results in a larger percentage change in
quantity demanded. Suppose that a 2 percent decline in the price of cut flowers results in a 4 percent
increase in quantity demanded. Then demand for cut flowers is elastic.
If demand is elastic, a decrease in price will increase total revenue. Even though a lesser price is
received per unit, enough additional units are sold to more than make up for the lower price. The
analysis is reversible that means if demand is elastic; a price increase will reduce total revenue. The
revenue gained on the higher-priced units will be more than offset by the revenue lost from the lower
quantity sold. Bottom line: Other things equal, when price and total revenue move in opposite
directions, demand is elastic. The price elasticity of Demand may be defined as the ratio of the relative
change in demand and price variables. The price elasticity of demand is computed as the percentage
change in the quantity demanded divided by the percentage change in price.

P ric e e la s tic ity o f d e m a n d =

Perfectly elastic demand

P e rc e n ta g e c h a n g e in q u a n tity d e m a n d e d
P e rc e n ta g e c h a n g e in p ric e

Perfectly inelastic demand

A set of graphs shows the relationship between demand and total revenue (TR) for a linear demand
curve. As price decreases in the elastic range, Total revenue increases, but in the inelastic range, Total
revenue decreases. Total revenue is maximized at the quantity where PED = 1.
The price elasticity of demand can be applied to a variety of problems in which one wants to know the
expected change in quantity demanded or revenue given a contemplated change in price.
Elasticity is an important concept in understanding the incidence of indirect taxation, distribution of
wealth and different types of goods as they relate to the theory of consumer choice.
Elasticity is also crucially important in any discussion of welfare distribution, in particular consumer
surplus, producer surplus, or government surplus.

Q.2
The elasticity of supply
Definition: the responsiveness of the quantity supplied to a small change in price.
The measure roughly indicates the slope of the supply curve; the steeper the more inelastic. Why is
this only roughly? Because it depends on the scale of the diagram, for instance both the diagrams
below have the same elasticity, but because the horizontal scale is not the same the slopes look
different. That is why we have to draw two different elasticities on the same diagram where the scale
is the same.

But unit elastic supply is any straight line that cuts through the origin

Supply periods and time

Very short run = totally inelastic supply = fixed supply (e.g., the amount in a wholesale vegetable
market delivered each morning; all the works of dead painters or sculptors).
Short run = perhaps moderately inelastic.
Long run = more elastic; or even negative elasticity (it slopes downward).
Why is supply more elastic in the long run?

Because the company can alter both the fixed and variable factors (i.e., all the factors of production).
It can also find new or cheaper sources of raw materials; improve the training of labor; and introduce
new technology or better machines. This allows the company to obtain more output without needing
much increase in price.
The downward sloping supply curve in the long run is already familiar to you: computers, scanners,
TV sets, digital cameras, DVD players and discs, CD players and disc. Most of the products of
modern hi-tech industry fall into this category. As the years go by, they get better and a lot cheaper.