Principles of Economics

2708 Words Sep 6th, 2013 11 Pages
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
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Demand for a commodity is always at a price. A person’s demand for a commodity varies according to its price. At a lower price he will buy more of a commodity and only less at a higher price. The demand for a commodity also implies the amount of the commodity to be purchased at a particular time, say, a day, a week etc.
ELASTICITY OF DEMAND Elasticity of demand refers the degree of responsiveness of demand for a commodity to a change in its price. Elasticity means responsiveness or sensitiveness. The law of demand makes it clear that change in price leads to a change in demand. But it does not explain at what rate demand changes when price changes. It is for explaining this aspect of demand that the concept of elasticity of demand is introduced. Elasticity of demand tells us exactly how much the quantity demanded would increase or decrease as a result of a given fall or rise in price. An important aspect of a product’s demand curve is how much the quantity demanded changes when the price changes. The economic measure of this response is the price elasticity of demand. The price elasticity of demand measures the responsiveness of quantity demanded to a change in price, with all other factors held constant. The Price Elasticity of Demand (commonly known as just price elasticity) measures the rate of response of quantity demanded due to a price change. The formula for the Price