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ECN 201: Principles of Microeconomics Nusrat Jahan Lecture-3

ECN 201: Principles of Microeconomics Nusrat Jahan Lecture-3. Elasticity. Price elasticity of demand shows the percentage change in quantity demanded due to percentage change in price. The demand for a good is said to be – Price Elastic if E d >1 Price Inelastic if E d <1

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ECN 201: Principles of Microeconomics Nusrat Jahan Lecture-3

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  1. ECN 201: Principles of Microeconomics NusratJahan Lecture-3 Elasticity

  2. Price elasticity of demand shows the percentage change in quantity demanded due to percentage change in price. • The demand for a good is said to be – • Price Elastic if Ed>1 • Price Inelastic if Ed<1 • Unit Elastic if Ed=1 • Elastic Demand and Inelastic Demand • Perfectly elastic demand: The demand for a good is perfectly elastic if the price elasticity of demand is infinite. In this case the demand curve becomes horizontal. • Perfectly inelastic demand: The demand for a good is perfectly inelastic if the price elasticity of demand is zero. In this case the demand curve becomes vertical.

  3. Price elasticity of demand and total revenue • The total revenue from the sale of a good equals the price of the good multiplied by the quantity sold. • When a price changes, total revenue also changes. But a cut in the price does not always decrease total revenue. The change in total revenue depends on the elasticity of demand in the following way: • If demand is elastic, a 1 percent price cut increasesthe quantity sold by more than 1 percent and total revenue increases. • If demand is inelastic, a 1 percent price cut increases the quantity sold by less than 1 percent and total revenue decreases. • If demand is unit elastic, a 1 percent price cut increases the quantity sold by 1 percent and total revenue does not change.

  4. Cross price elasticity • The cross elasticity of demand is a measure of the responsiveness of thedemand for a good to a change in the price of a substituteor complement, other things remaining thesame. • Substitute Goods: Cross Elasticity is Positive • Complements: Cross Elasticity is Negative • Income elasticity of demand • Percentage change in quantity demanded due to percentage change in income. • Normal Good: When income elasticity of demand is positive the good is a Normal good. • Inferior Good: When income elasticity of demand is negative the good is an Inferior good. • Necessities: Goods which are income inelastic are necessities. • Luxuries: Goods which are income elastic are Luxuries.

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