MEFA Unit 2

UNIT-II
(Demand and Supply)

MODULE-1: LAW OF DEMAND
CONTENTS:
1.0 : Introduction
1.01: Objectives
1.02: Meaning of demand
1.03: Demand function
1.04: Types of demand
1.05: Price demand
1.06: Demand schedule
1.07: Individual demand curve
1.08: Estimation demand
1.09: Reasons for negative slope of demand curve
1.10: Exceptions to the law of demand
1.11: Summary
1.12: Additional references
1.13: Self assessment test
1.0: INTRODUCTION: In economics the use of the word demand is made to

show the relationship between changes in independent variable i.e the price
income etc and consequent change in dependent variable. i.e quantity of a
commodity that would be purchased. The demand for a commodity at different
prices, income levels indicates the behavior of rational human beings involved in
the consumption of a commodity. The demand for a commodity reflects the size
and pattern of demand for the product.
1.01: OBJECTIVES: The objective of this module is to explain the meaning of

demand, the influencing factors of demand, extension and contraction in
demand, increase and decrease in demand. After studying this module, you
should be able to explain:
The meaning of demand

The determinants of demand
The reasons for negative slope of the demand curve
Exceptions to the law of demand
1.02: MEANING OF DEMAND:
Generally speaking, by demand we mean effective demand. Demand becomes

effective, when the desire is backed by willingness and ability to buy a
commodity at a given price. In other words, a person must three things in order
to have demand for a commodity. They are:
Desire to buy
Willingness to pay for the commodity
Ability to pay for the commodity.
A miser or a greedy person may have enough income and desire to buy a
commodity, but he may not be willing to pay for it. In this case, we can say that
there is no demand for the commodity from the point of view of a miser. This
indicates that a mere desire does not imply demand. It must be backed by
willingness and ability. In simple terms, the effective fulfillment of a desire is
known as demand.
1.03: DEMAND FUNCTION:

We know that the demand for a commodity is determined by large number of
factors. We can write all these factors which influence the demand for a
commodity in the form of a function as shown below.
DX = f (PX PSC Y, T, AE, W . . . . . . .)
In the above function
DX = Demand for commodity -X (Dependent variable)

PX = Price of
PSC = Prices of substitutes and complementary goods to X
Y = Income of consumer
T = Tastes and preferences
AE = Advertisement expenditures
W = Weather conditions
1.04: TYPES OF DEMAND:

Basically there are four types of demand. They are
Price demand
Income demand
Cross demand
Promotional demand
1.05: PRICE DEMAND (Law of demand):
In the above demand function we have identified the determinants of demand
and written the demand function as:
DX = f (PX PSC Y, T, AE, W . . . . . . . )
We know that in reality, the changes in all the independent variables influence
the demand for X commodity. For analytical simplicity, while analyzing the
price demand, we assume variables other than its own price remain constant. In
such a case we can write the simplified price demand function as
DX = f ( PX )
This function tells us that, other things remaining constant; there exists an
inverse relationship between price of X and the demand for X. That is as the price
of X falls, the demand for X extends and as the price of X rises; the demand for X
contracts assuming that there is no change in other determinants of demand.
This relationship between price of X and the demand for X is known as the ‘The
Law of Demand’. Now we can understand the inverse relationship between price
of X commodity and the quantity demanded of X commodity with the help of
demand schedule.
1.06: DEMAND SCHEDULE:

The demand schedule is simply a table showing the number of units of a
commodity would be purchased at various prices at any given point of time. The
individual demand schedule reflects the purchase behavior of a consumer at
different prices. A hypothetical demand schedule of a consumer is shown below.
Price of X commodity Demand for X

(Rs) (Units)
1 10
2 9
3 8
4 7
5 6
The demand schedule shown above reveals inverse relationship between price
of X and demand for X i.e as price rises from Re 1 to Rs 5, the quantity demanded
contracted from 10 units to 6 units and vice-versa. By plotting the information
given above in a diagram and joining the corresponding price and quantity
points, we can derive the demand curve.
1.07: INDIVIDUAL DEMAND CURVE:

A demand curve is a graphic representation of demand schedule. While drawing
the demand curve, we measure demand for X horizontal axis and price on
vertical axis. The usual shape of the normal demand curve is as follows.
GRAPH-1
Y
D
Price
0 X
Demand
The basic feature of the price demand curve is, it slopes downward from left to
right. This reveals the fact that quantity demanded is inversely related to price.
1.08: ESTIMATION OF DEMAND:

With the help linear demand we can understand the relationship between price
and quantity demanded. For example: Qd = a –bPx . In this demand function,
Qd is the quantity demanded, ‘a’is the autonomous demand ie the demand at
zero price (intercept), ‘b’ is the induced demand (slope) and Px is the price. The
estimated demand function is Qd = 10 - . 5 Px. Given demand function we can
construct a demand schedule i. we can identify quantity at different prices as
shown below.
Price Quantity
(Rs) (Units)
0 10
1 9.5
2 9.0
3 8.5
4 8.0
5 7.5
6 7.0
Based on this information we can derive demand curve as shown below.
GRAPH-2
D
Qd = 10 - .5Px
Price
0 10
Demand
ACTIVITY-1
1. What is the meaning of demand?

2. Specify a demand function for four wheelers.
3. Given the estimated demand function Qd = 20 - . 5Px, construct demand
schedule and identify show its intercept and slope in terms of graph.
1.09: REASONS FOR NEGATIVE SLOPE OF THE DEMAND CURVE:
1. Law of Diminishing Marginal Utility:
Economists, who believe in cardinal utility concept, say that diminishing

marginal utility for the consumer is the fundamental reason for negatively
sloped demand curve. According to them as the price of the commodity falls,
consumer purchases more of a commodity, so that the marginal utility from the
commodity also falls to equal the reduced price and vice-versa.
2. Income effect:
As the price of a commodity falls, the real income of a consumer increases in

terms of the commodity whose price has fallen. As a result, a part of the increase
in real income is used buy more of a cheaper commodity. This implies that as
price falls the quantity demanded extends and vice –versa.
3. Substitution effect:
According to ordinal utility approach, the substitution effect of change in price is
the basic reason for the application of Law of Demand. When the price of a
commodity falls, it becomes cheaper compared to other commodities which the
consumer is purchasing. As a result, the consumer would like to substitute this
cheaper commodity for other commodity whose price whose price remains
constant.
4. New consumers:
When the price of a commodity is reduced, then a large number of new

consumers who were not consuming the commodity start purchasing it now,
because they can now afford to buy it.
5. Different uses of the commodity:
Commodities have different uses. If their price rises, they are used only for
important purposes. As a result the demand for such commodities contracts. On
the other hand, when the price is reduced, the commodity may be used for
satisfying different needs. As a result its demand extends.
1.10: EXCEPTIONS TO THE LAW OF DEMAND:

The inverse relationship between price and quantity demand i.e simply the law
of demand does not hold good with respect to all types of commodities and
under all conditions. With respect to some commodities, there exists direct
relationship between price and quantity demanded i.e as price rises, the demand
extends and as price falls, demand contracts. Such commodities are to be treated
as exceptions to the law of demand. The exceptions to the law of demand are
discussed below.
1. GIFFEN GOODS:
There are some commodities which are inferior from the consumers view point..
Sir Robert Giffen was mentioned by Marshhall as having discussed such
exceptions. Giffen stated that with a fall in price of bread its quantity demanded
was reduced rather than increased. This is known as Giffen Paradox.
In a country like India take a poor man who has to spend a major portion of his
income on low quality grain and is therefore, able to spend a small part of it on
other goods. If the price of this coarse grain rises, he will be left with still less
money to spend on other goods. As a result he may be forced to spend this part
of his income also on the grain whose price has risen. On the other hand, if the
price of the grain falls, the real income of the poor consumer rises and he can go
for the consumption of better quality goods.
2. ARTICLES OF DISTINCTION:
These goods are also known as prestige goods are status symbol goods or
Veblen goods. According to Veblen, the demand for articles of distinction such as
diamonds and jewellery is more as their price is higher. This is because, a rich
man’s desire for distinction is satisfied better when the articles of distinction are
highly priced and the poor people cannot afford to buy.
3. EXPECTATIONS:
These expectations are basically related to rise and fall in price in future. If
consumers expect a rise in price of a commodity, they rush to purchase more of
the commodity at the current price even though the current price is much higher
than the previous price. If they expect a fall in price, they purchase less of the
commodity at present in the hope of buying it at a lesser price.
In all these exceptional cases the law of demand does not hold good.
ACTIVITY- II
1. What do you mean by exceptions to the law of demand?
2. What is Giffen’s paradox?
3. Give examples for Veblen goods.
1.11: SUMMARY:
Demand means the effective fulfillment of a desire. A mere desire does not
represent the demand for a commodity. In order to have demand, desire to buy a
commodity must be backed up by willingness and ability to buy. In reality a
large number of factors determine the demand for a commodity. We have
analysed the law of demand by assuming other things remaining constant. In
case of price demand there is an inverse relationship between price and quantity
demanded. With regard to exceptional cases the law of demand does not hold
good.
1.12: ADDITIONAL REFERENCES:

1. Stonier and Hague: A Text Book of Economic Theory.
2. K.N.Verma: Micro economic theory.
1.13: SELF ASSESSMENT TEST:

1. Discuss the reasons for inverse relationship between price and quantity.
UNIT-II
(Demand and Supply)
MODULE- 2: INCOME AND CROSS DEMAND.
CONTENTS:
2.0: Objectives
2.01: Meaning
2.02: Income Demand
2.03: Cross Demand
2.04: Promotional Demand
2.05: Extension and contraction in demand
2.06: Increase and decrease in demand
2.07: Summary
2.08: Additional References
2.09: Self assessment test.
2.0: OBJECTIVES:
The objective of this unit is to explain the meaning of income and cross demand.
After reading this unit you should be able to explain the:
Meaning of income, cross and promotional demand

Expansion and contraction of demand
Increase and decrease in demand.
2.01: MEANING:
Income demand shows the relationship between changes in demand as a result
of change in income, given other things. Cross demand shows the relationship
between changes in demand for A product as a result of change in the price of b
product, given other things. Products A and B may be either substitutes or jointly
demanded. Promotional demand shows the relationship between advertisement
expenditures and the sales, given other things.
2.02: INCOME DEMAND:
The general demand is DX = f ( PX PSC Y, T, AE, W . . . . . . . )

PX = Price of
PSC = Prices of substitutes and complementary goods to X
Y = Income of consumer
T = Tastes and preferences
AE = Advertisement expenditures
W = Weather conditions
Assuming other things remaining constant, we can write the income demand
function as Dx = f (y). Here Dx is the demand for x commodity and y is the
income of consumer.
While analyzing the relationship between change in income and demand for a
commodity, we classify goods in to Superior and inferior.
Superior goods: In case of superior goods, there exist direct relationship between
change in income and demand. We can understand this with the help of a
diagram.
GRAPH-1
Y
Income demand Curve
Y2
Y1
Income
Q Q1 Q2
Demand
The diagram above shows that if income is OY1, the demand is OQ1. If income
rises to OY2 demand increased to OQ2 and if income falls to OY, the demand is
reduced to OQ. The income demand curve incase of normal goods has positive
slope. Income demand curve for consumer durables represent Engel’s Law. This
law states as income increases, the proportion of income diverted towards
purchasing durable consumer goods also increases.
Inferior goods:
Demand is inversely related to change in income with respect to inferior goods.
GRAPH-2
Y2
Income
Y1 Income demand Curve

Y
Q Q1 Q2 X
Demand
As shown in above diagram, original level of income is OY1 and corresponding

demand OQ1. If income rises from OY1 to OY2, the demand for inferior good
decreased from OQ1 to OQ. On the other hand if income falls from OY1 to OY,
the demand increased from OQ1 to OQ2. The income demand curve incase of
inferior goods has negative slope.
ESTIMATION OF INCOME DEMAND:

With the help linear demand function we can understand the relationship
between income and demand. For example: In case of superior goods we can
specify income demand function as Qd = a +by. In this demand function, Qd is
the demand, ‘a’is the autonomous demand ie the demand at zero income
(intercept), ‘b’ is the induced demand (slope) and y is the price income. In case of
inferior goods we can use the demand function as Qd = a –by. The estimated
income demand is Qd = 100 +. 5y (superior or normal goods) and Qd = 100- .5y
(inferior goods) . Given the values of income we can construct demand schedule.
Demand we can construct a demand schedule i. we can identify quantity at
different prices as shown below.
ACTIVITY-I
1. List out superior goods.
2. List out inferior goods.
203: CROSS DEMAND:

This shows the relationship between changes in demand for one commodity as a
result of change in the price of another commodity, assuming other things
remaining constant. These two commodities may be either substitutes or
complementary goods. We can write the cross demand function as shown below.
DA = f (PSC)
DA = Demand for commodity - A (Dependent variable)

PSC = Prices of substitutes and complementary goods to A
Substitutes: If two commodities are substitutes, then we can use A commodity

or B commodity for the same purpose. Examples of substitutes are T.Vs, fans,
watches, coolers, bikes, four wheelers from two companies etc. In the case of
substitutes, if the price of B rises, the demand for A increases and if the price of B
falls, the demand for A decreases. Cross demand curve related to substitute
goods slopes upward from left to right as shown below.
GRAPH-3
Cross demand curve for

Substitutes
P2
P1
Price of B
Q Q1 Q2 X
Demand for A
Complementary goods:
These goods also known as jointly demanded products. Examples are petrol and
automobiles, pen and ink, pen and paper etc. Let us assume that A and B are
complementary goods. Then, if price of B rises the demand for A falls and vice-
versa.
GRAPH-4
P2
P1
e of B
P
The above diagram indicates that as the price of B rises from OP1 to OP2, the
demand for A decreases from OQ1 to OQ. On the other hand if the price of B
falls from OP1 to OP,the demand for A increases from OQ1 to OQ. In case of
complementary goods, the cross demand curve slopes downward from left to
right.
ESTIMATION OF CROSS DEMAND:

With the help linear demand function we can understand the relationship
between price of B and demand for A. For example: In case of substitutes we can
specify cross demand function as Qd = a +bPB. In this demand function, Qd is
the demand, ‘a’is the autonomous demand ie the demand at zero price of B
(intercept), ‘b’ is the induced demand (slope) and PB is the price of B. In case of
complementary goods we can use the cross demand function as Qd = a –bPB.
The estimated cross demand is Qd = 10 +. 5PB (substitutes) and Qd = 10- .5PB
(complementary goods) . Given the values of PB we can construct cross demand
schedule.
ACTIVITY-2
1. List out substitute commodities.
2. List out jointly demanded products.
2.04: PROMOTIONAL DEMAND:
This shows the relationship between changes in demand as a result of change in
advertisement expenditures, assuming other things remaining constant. It is a
fact that business firms generally spend huge amount towards promoting sales
of their product. We can write the promotional demand function as shown
below.
DX = f (AE)
AE = Advertisement expenditures.
We can show the relationship between advertisement expenditures and sales

with the help of following graph.
GRAPH-5
Y Sales
Sales
100 X
Advertisement expenditure
The diagram above shows that in the beginning even without advertisement a
business firm can sell certain quantity of commodity. One can observe direct
relationship between advertisement expenditures and sales up to a certain level
of advertisement expenditure. For example up to Rs 100 crores. After that it is
not possible to increase sales through advertisement. As a result, sales curve has
become parallel to horizontal axis.
2.05: Extension and contraction in demand:
This refers to a movement along the demand curve. Change in demand as a
result of change in price, other things remaining constant, either called as
extension or contraction in demand. Extension and contraction is to be shown on
the same demand curve through different points. We can see this with the help
of following diagram
GRAPH-6
D
Contractio
A n
P
2 B Extension
Price
P
1 C
P
Q Q1 Q2
Demand
According to the above diagram, if the price is OP1, the quantity demand is OQ1.
This is indicated by point B on the demand curve. If the price of the commodity
rises from OP1 to OP2 the quantity demanded is reduced to OQ. This
corresponds to point A on the demand curve. This reduction or fall in demand as
a result of rise in price is described as contraction in demand. On the other hand,
if price falls from OP1 to OP the quantity demanded rises to OQ2 which
corresponds to point C on the demand curve. This is called Extension in demand.
Backward movement from B to A on the demand curve, given other things , is
called as contraction in demand and a forward movement from B to C is called as
extension in demand.
2.06: Increase and decrease in demand:

This refers to shift in demand curve. Given the price, if there is change in other
factors which influence the demand, i.e. income, prices of substitutes and
complementary goods, advertisement expenditure etc, the resulting change in
demand is to be shown through a shift in demand curve. We can understand this
with the help of following diagram.
GRAPH-7
Y
D2
D1
D0
A B C
P
Price
D2
D1
D0
Q Q1 Q2
Demand
The above diagram indicates that, initially if the price is OP, the demand is OQ1
corresponding to point B on D1D1 curve. Given the price assume that there is
change in other factors i.e. increase in income. In such a case the consumer may
buy more of the commodity i.e OQ2 at price OP. As a result of this, D1D1 shifts
toD2D2. On the other hand, given the price, if there is fall in income, then the
consumer may buy less i.e.OQ of the commodity. In this case the demand curve
shifts from D1D1 to D0D0. The upward shift in demand curve from D1D1 to
D2D2 is called increase in demand and a downward shift in demand curve from
D1D1 to D0D0 is called decrease in demand.
2.07: Summary:
Change in demand as a result of change in income, assuming other things
remaining constant is known as income demand. Change in demand for one
commodity as a result of change in price of other related product, ceteris paribus,
is known as cross demand. Change in demand as a result of change in
advertisement expenditure is called as promotional demand. Upward or
downward movement along the same demand curve is known as extension and
contraction where as upward or downward shift in demand curve known as
increase in demand and decrease in demand.
2.08: ADDITIONAL REFERENCES:

1. Stonier and Hague: A Text Book of Economic Theory
2. K.N.Verma: Micro Economic Theory
2.09: Self Assessment Test:

1. Discuss income, cross and promotional demand.
2. Spell out the distinction between extension and contraction in demand.
UNIT-II
(Demand and Supply)
MODULE- : PRICE ELASTICITY OF DEMAND
Notes:
CONTENTS:
3.0: Introduction
3.01: Objectives
3.02: Meaning of elasticity
3.03: Price elasticity of demand
3.04: Estimation of price elasticity
3.05: Factors influencing price elasticity
3.06: Summary
3.07: References
3.08: self assessment test
3.0: INTRODUCTION:
In Module –I of Unit-II we have discussed the law of demand. The law of
demand explains the direction of demand i.e the law of demand states that the
price of a commodity and the quantity demanded of that commodity move in
opposite direction. It does not tell us anything about the extent or magnitude of
change in demand as a result of given percentage change in price. In order to
know the quantum of change in dependent variable as a result of given
percentage change in the independent variable, we have to take the help of
elasticity concept.
3.01: OBJECTIVES:
The objective of this module is to explain the meaning and measurement of price
elasticity of demand. After reading this unit you should be able to understand:
Meaning of elasticity
Meaning of price elasticity
Measurement of price elasticity
Estimation of price elasticity
Influencing factors of price elasticity.
3.02: MEANING OF ELASTICITY:

In general elasticity means the degree of responsiveness of the dependent
variable to a given proportionate change in the independent variable. This we
can write as:
Proportionate change in the dependent variable

Elasticity of demand = ---------------------------------------------------------------------
Proportionate change in the independent variable
3.03: PRICE ELASTICITY OF DEMAND:

This indicates the degree of responsiveness of demand for a commodity to a
given proportionate change in the price of that commodity. In other words we
can say that it is the ratio between percentage changes in quantity demanded to
percentage change in price. While estimating price elasticity, we have to take into
account demand as the dependent variable and the price as the independent
variable. We can write the price elasticity principle as shown below.
Proportionate change in quantity demanded

Price Elasticity of demand = ----------------------------------------------------------------
Proportionate change in price
This we can write as

Change in quantity demanded
-------------------------------------------
Original quantity
Price Elasticity of demand = -------------------------------------
Change in price
---------------------------
Original price
NOTE-1
Use notations for

Here/change in Quantity = ∆ Q
Original Quantity =Q
Change in price = ∆P
Original Price = P
Now we can write the price elasticity as =

= × = ×
Here is equal to slope of the demand curve or rate of change i.e. and P/Q
is the ration between price and quantity
Degrees of Price elasticity: Depending on the value of price elasticity, the price
elasticity of demand is divided in to five. Let us discuss them in detail.
1.Perfectly elastic demand: If an insignificant or near zero percentage change in

price causes an infinite or very large percentage change in demand, it is known
as perfectly elastic demand. In this case, the value of elasticity will be equal to
infinity and the demand curve will be parallel to horizontal axis as shown below.
GRAPH-1
Y
Price elasticity = ∞
D
Price
0 X
Demand
2. Perfectly inelastic demand: If the demand is non-responsive to a given
proportionate change in price, it is known as perfectly inelastic demand. In this
case the value of price elasticity is equal to zero and the demand curve will be
parallel to vertical axis as shown below.
GRAPH-2
Y
D
B
P2
Price elasticity =
rice
P1
The above diagram indicates that, even if the price rises from P1 to P2 or falls
from P2 to P1, the quantity demanded remains constant as ‘OQ’.
3. Unitary elasticity:
If the proportionate change in quantity demanded is exactly equal to

proportionate change in price, then it is called as unitary elastic demand. In this
case the value of elasticity is equal to one(1) and the demand curve will be like
rectangular hyperbola as shown in graph.
GRAPH-3
Y
D
Price elasticity = 1 (one)

Price
0
Demand
4. Relatively elastic demand: If the proportionate change in demand is more
than the proportionate change in price, it is known as relatively elastic demand.
In this case the value of elasticity will be greater than one.
5. Relatively inelastic demand:

If the proportionate change in demand is less than the proportionate change in
price, it is known as relatively inelastic demand. In this case the value of
elasticity will be less than one.
ACTIVITY -1
1. Define elasticity of demand.

2. Draw the shape of demand curve in case of unitary elasticity.
MEASUREMENT OF PRICE ELASTICITY:
In order to measure the price elasticity, there are three methods available in
economic literature. They are:
Total Outlay Method
Point Method
Arc Method.
Now we try to understand each one of the above methods.
Total outlay method:

This method is also known as total expenditure method. Under this method the
price elasticity is measured in terms of pattern of expenditure on any
commodity. That is as price falls, the law of demand states that demand rises.
But here the question is, what happens to the expenditure on that commodity.
Will expenditure increase or decrease or remain constant?. Based on this i.e.
expenditure pattern, the price elasticity of demand is explained in terms of
Elastic demand
Unitary elastic demand
Inelastic demand
Elastic demand: As a result of fall in price the demand increases and at the same
time if the expenditure on this commodity increases, it is known as elastic
demand.
Unitary elastic demand; As a result of fall in price the demand increases and at
the same time if the expenditure on this commodity remains constant, it is
known as elastic demand.
Inelastic demand: As a result of fall in price the demand increases and at the
same time if the expenditure on this commodity decreases, it is known as
inelastic demand.
We can understand elastic, unitary elastic and inelastic demand with the help of
following example:
NOTE- 2
Quantity of A Price of A Total Expenditure

(Units) (Rs) (Rs)
1 10 10
2 9 18
3 8 24 Elastic demand
4 7 28
5 6 30
Unitary elastic
6 5 30
7 4 28
8 3 2 in elastic demand
9 2 18
10 1 10
According to the above example, as price falls from Rs.10 to Rs 6,the quantity of
A commodity increased from 1 unit to 5 units and the expenditure on A
commodity increased from Rs 10 to Rs 30. So this is the case of elastic demand.
As price falls from Rs 6 to Rs 5, the quantity of A increased from 5 units to 6
units. But the expenditure on the commodity remains constant. So this is the case
of unitary elasticity.
Finally, as the price falls from Rs 5 to Rs 1 the quantity of A increased but the
expenditure on this commodity decreased from Rs 30 to Rs 10. So this is inelastic
demand.
By plotting the above data in a diagram we can derive the total expenditure total
outlay curve. The shape of the total expenditure curve is shown below.
GRAPH-4
Y
A
e>1
B
E=0
Price
E<1
D
Total expenditure
Point elasticity Method
This method is known as geometric method. This method is used to find out the
value of price elasticity of demand at any point on a straight line demand curve.
Under this method, the principle for estimating price elasticity at any point on
the demand curve is shown below.
Distance of lower segment of the demand curve

Price elasticity at any point = ------------------------------------------------------------
On the demand curve Distance of upper segment of the demand curve.
We can understand the point elasticity with the help of the following diagram.
GRAPH-5
Y
A
B
C
Price
E
Demand
In the above diagram we have drawn a straight line demand curve AE and
identified different points on this curve such as A,B,C,D and E.
CE (lower segment)
Elasticity of demand at point C is = ---- ---------------------- = 1
CA (upper segment)
Because C is a mid -point on the straight line demand curve. So point C dividng
the AE demand curve in to two equal parts as CE and CA.
DE
The price elasticity of demand at point D= ----- = less than one
AD
0 (ZERO)
The price elasticity of demand at point E= ----- = 0(zero)
AE
BE
The price elasticity of demand at point B= ----- = more than one
AB
AE
The price elasticity of demand at point A= ----- = infinite
Zero
The above analysis indicates that each and every point on the straight line
demand curve denotes a different value of elasticity. If you are moving from mid
point (C) towards quantity axis the value of elasticity decreases. Where as if you
move from mid -point towards price axis the value of price elasticity increases.
Arc Method:
This method is used to find out price elasticity on a segment of the demand
curve rather than at a particular point.
GRAPH-6
Y
D
P2 A
P1 B
D
Price
Q2 X
Q1
Demand
In the above diagram AB represents a small segment on the demand curve DD.
By using Arc method it is possible to find out price elasticity on AB segment
rather than either at point A or at point B. The principle for the estimation of
price elasticity under this method is:
NOTE-3
Price elasticity of demand =
Further we can write this as
Example: Let initial price is Rs 10. Quantity demanded is 100 units. Price falls to Rs 8.
Quantity demanded increased to 140 units. Price elasticity of demand is:
Here change in demand = 40 units
Change in Price = Rs 2
Original demand = 100 Units
New demand =140 units
Original =Rs 10
New Price = Rs 8
Substituting these different values in the above principle we can get price elasticity value.
= ×
= ×
= (-) 1.5
We can say that, on AB segment of the demand curve, the value of price elasticity is (-)
1.5. This indicates that 1% fall in price causes 1.5% rise in demand and vice-versa.
3.04: ESTIMATION OF PRICE ELASTICITY:
With the help of estimated demand function we can find out price elasticity
value. For example Qd = 10- .5 PX. If the price is Rs 10 the value of price elasticity
is:
NOTE-4
Price elasticity of demand = ×

Here or = 0.5 as given demand function. Using the demand function Qd=10-
.5Px, we can find out Qd at Rs 10
Qd = 10 - .5 × 10
= 10 -5
=5
By substituting these values in the demand function we can find out the value of price
elasticity.
Price elasticity = (-)0.5 ×
= (-) 1 since the value of price elasticity of demand is 1(one), its nature
is unitary elastic.
ACTIVITY-2
1. What is the principle for price elasticity?

2. What is the value of price elasticity at midpoint of straight line demand
curve?
3.05: FACTORS INFLUENCIMG PRICE ELASTICITY OF DEMAND:
The value of price elasticity of demand is influenced by different factors. They

are:
1. Nature of commodity:
In case of commodities which are considered as necessaries, the price elasticity

tends to be inelastic. For example: Rice, sugar etc. These commodities have got to
be purchased irrespective of their prices. When price rises, consumers cannot
reduce their consumption. In case of luxury commodities, the price elasticity
tends to be elastic.
2. Number of uses:
If a commodity can be put to large number of uses, its demand tends to elastic.
In this case, as a result of fall in price, consumers want to put that commodity
even for not so important purpose. Due to this, the demand will respond
significantly as a result of fall in price.
3. Availability of substitutes:
If a commodity is having large number of substitutes, its price elasticity of
demand tends to be elastic.
4. Postponement of consumption:
If it is possible to postpone the consumption of a commodity under
consideration, the price elasticity of demand tends to be elastic.
5. Range of prices:
At very low price, the elasticity of demand tends to be inelastic.
6. Time element:
Generally in the long-run the elasticity of demand is more responsive i.e elastic,
compared to the short-run.
7. Habits:
If the consumers are habituated to consume a commodity, then the demand for
such commodities tends to inelastic.
ACTIVITY-3
1. List out the factors influencing price elasticity of demand.
3.06: SUMMARY:
In this module we discussed at length the concept of price elasticity, its

estimation and its determinant. Price elasticity is a ratio between proportionate
change in quantity demanded to proportionate change in price. Price elasticity
indicates the responsiveness in demand as a result of given percentage change in
price. With the help of demand function we can estimate price elasticity.
3.07: References:
1. Stonier and Hague ; Text Book of Economic Theory

2. H.L Ahuja: Advanced Economic Theory
3. Dominick Salvatore ; Managerial economics in a Global Economy
1. Define price elasticity of demand and explain its determinants.
2. Discuss different methods of measuring price elasticity of demand.

UNIT-II
(Demand and Supply)
MODULE- 4: INCOME, CROSS AND PROMOTIONAL ELASTICITIES
CONTENTS
4.0: Objectives
4.01: Income Elasticity of Demand
4.02: Cross Elasticity of Demand
4.03: Promotional Elasticity of Demand
4.04: Applications of Elasticity concept
4.05: Summary
4.06: References
4.07: Self assessment test
4.0: OBJECTIVES:
The objective of this module is to examine the responsiveness in demand to a
given percentage change in income, price of related products and promotional
expenditure. After reading this module you should be able to understand:
The concept of income elasticity

The concept of cross elasticity
The concept of promotional elasticity
Applications of elasticity concept.
4.01: INCOME ELASTICITY OF DEMAND:
This refers to degree of responsiveness of demand for a commodity as a result of

given proportionate change in income of a consumer. In other words, it is the
proportionate change in demand as a result of given proportionate change in
income. The principle for the estimation of income elasticity of demand is:
NOTE-1
Income elasticity
Of demand =
We can write this as
=
Here is equal to the slope of income demand Curve.
The value of income elasticity may be positive or negative. It all depends on the
nature of the commodity. In case of normal / superior goods the income
elasticity of demand will have a positive sign. This indicates the direct
relationship between percentage change in income and percentage change in
demand. So in this case as income increases, demand also increases. In case of
inferior goods the income elasticity of demand will have a negative sign. This
negative sign indicates the existence of inverse relationship between the
percentage change in income and percentage change in demand. Therefore, in
this case as income increases the demand for inferior goods decreases.
Degrees of income elasticity:
Depending on the value of elasticity, the income elasticity of demand is classified

as:
1. Perfectly elastic income demand:
If the proportionate change in the demand for a commodity is infinite or so

large with reference to an insignificant or zero percentage change in income,
it is known as perfectly elastic income demand. In this case the value of
elasticity is equal to infinite and the shape of the demand curve will be
parallel to horizontal axis as shown below.
GRAPH-1
Y
YD
Y1
income
X
0
Demand
2. Perfectly inelastic income demand:
If the proportionate change in demand for a commodity is equal to zero with

respect to a given proportionate change in income, It is known as perfectly
inelastic income demand. In this case the value of income elasticity will be equal
to zero and the income demand curve will be parallel to vertical axis.
GRAPH-2
Y Yd
Income
Q1 X
0
Demand
3. Unitary elastic income demand:
If the proportionate change in demand is equal to the proportionate change in

income, it is known as unitary income elasticity. In such a case, the value of
elasticity will be equal to one (1) and the income demand curve will be straight
line passing through origin.
GRAPH- 3
Yd
ome
4. Relatively elastic income demand:
If the proportionate change in demand is more than the proportionate change in
income, it is known as relatively elastic income demand. In this case the value of
income elasticity is more than one and the shape of the demand curve is shown
as below.
GRAPH-4
Yd
Income
X
0
Demand
5. Relatively inelastic income demand:
If the proportionate change in demand is less than the proportionate change in

income, it is known as relatively inelastic income demand. In this case the value
of income elasticity is less than one and the shape of the demand curve is shown
as below.
GRAPH-5 Y
Yd
6. Negative income elasticity:
If the proportionate change in demand is inversely related to a given

proportionate change in income, it is known as negative income elasticity of
demand. In this case the value income elasticity will have a negative sign. This
happens in the case of inferior goods. With respect to inferior goods, the income
demand curve slopes downward from left to right.
GRAPH-6
Y
Income
Yd
0 X
Demand
Estimation income elasticity:

With the help of statistical income demand function we can estimate the value of
income elasticity. For example the given statistical income demand function is
NOTE-2
Qd = α + βY and the estimated functions is Qd = 100+.5Y. if the level of income is Rs
500
The value of income elasticity is;
Income elasticity = X or
= X
In the given example = .5, Y = Rs 500

Qd = 100 + .5 X 500
= 350
Income elasticity = .5 X
= (+).7
The value of income elasticity indicates that the product has relatively inelastic demand.
Sign (+) indicates, the product is normal/superior.
Activity-1
1. List out different degrees of income elasticity.
2. Given the demand function Qd = 200 - .5 Y, estimate income elasticity at
income level Rs 500 and comment on the nature product.
4.02: CROSS ELASTICITY OF DEMAND:
This refers to degree of responsiveness in the demand for X commodity as a

result of a given proportionate change in the price of Y commodity. This Y
commodity may be a substitute or complementary good to X commodity. The
principle for the estimation of cross elasticity of demand is:
NOTE-3
Cross elasticity of demand =

This can be written as
=
= X
Here = Change in demand for X commodity

= Original demand for X commodity
= Change in private of Y commodity
= Original Price of Y
The value of cross elasticity of demand may be negative or positive. In case, if the
two commodities X and Y are substitutes, the value of cross elasticity will be
positive. This indicates the existence of direct relationship between the price of Y
and demand for X i.e. the proportionate change in the demand for X commodity
is directly related to change in price of Y commodity. In this case the cross
demand curve will have a positive slope as shown below.
GRAPH-7
Y
Cd
Price of Y
X
0
Demand for X
In case if the two commodities i.e. X and Y are complementary goods, then the
value of cross elasticity will be negative. This indicates, that the proportionate
change in demand for X is inversely related to proportionate change in price of Y
i.e as price of Y rises, the demand for X decreases and vice versa. In this case the
cross demand curve will have a negative slope.
GRAPH-8
Y
Price of Y
Cd
X
0
Demand for X
4.03: PROMOTIONAL ELASTICITY OF DEMAND:
This refers to degree of responsiveness of demand for a commodity as a result of

given proportionate change in promotional expenditure. In other words, it is the
proportionate change in demand as a result of given proportionate change in
promotional expenditure. The principle for the estimation of promotional
elasticity of demand is:
NOTE-3
ACTIVITY-2
1. Define cross and promotional elasticity.

2. How do you identify substitutes and complementary goods?
4.04: APPLICATIONS OF ELASTICITY CONCEPT:
The concept of elasticity of demand is very useful to individuals,’ business firms

and the government. While arriving at different economic decisions, these
economic agents can take help of elasticity concept. The applications of elasticity
concept are:
1. Pricing decisions:
Business firms at present generally calculate price elasticity of demand for their
product while attempting to make any change in price of their product.
2. Pricing of joint products:

In case of joint products such as wool and mutton, it is not possible to separate
the costs of production. Hence, based on the elasticity concept, high price is fixed
for that product whose demand is relatively inelastic and low price is fixed for
that product whose demand is relatively elastic.
3. Foreign trade:
If a country wants get benefit by devaluing its currency, it is advantageous only
when the price elasticity of demand for its exports and also imports is more than
one. So before resorting to devaluation, it has to estimate the elasticity of demand
for exports and imports.
4. Fiscal policy:
Generally the government imposes taxes to mobilize resources. By imposing
high rate of tax on those commodities whose demand is inelastic, the
government can realize more revenue.
5. Business decisions:
As most of the goods are superior goods, economic growth will be associated
with increase in their sales. Producers may be really interested in knowing
whether the sale of their product will lead or lag economic growth. The income
elasticity of demand will enable them to know the answer.
If income elasticity of demand is greater than zero but less than one, sales of the
product will increase but slower than the general economic growth. If income
elasticity of demand is greater than one, sales of the product will increase more
rapidly than the general economic growth. For example: If the economy is
growing at 5% and the income elasticity of demand is 2, business firm can expect
sales to grow at the rate of 5% x 2= 10% annually.
6. To identify nature of commodities:
Income elasticity concept is useful to identify the nature of commodities that a
business firm is producing i.e. whether the commodities are normal or superior.
If the income elasticity is positive, the commodity is normal. On the other hand if
the income elasticity is negative, the commodity is an inferior type.
7. To identify substitutes and complements
Cross elasticity concept is very useful to identify whether the product produced
by a firm is substitute to other product or a complementary good.
ACTIVITY-3
1. List out the applications of elasticity concept.
2. In what way the income elasticity concept is useful to managers?
4.05: SUMMARY
In this module we discussed at length the concept of income, cross and
promotional elasticity and their estimation. Income elasticity is a ratio between
proportionate change in demand to proportionate change in income. Cross
elasticity is a ratio between proportionate change in demand for A commodity to
proportionate change in price of related Y commodity. Promotional elasticity is a
ratio between proportionate change in demand to proportionate change in
advertisement expenditures. Elasticity analysis also called as sensitivity analysis.
4.06: References:
1. Stonier and Hague ; Text Book of Economic Theory
2. H.L Ahuja: Advanced Economic Theory
3. Dominick Salvatore ; Managerial economics in a Global Economy
4.07: Self assessment test:
1. Discuss the meaning and concept of income elasticity.

2. Analyse cross and promotional elasticity concepts.
3. Discuss the importance of elasticity concept in decision making.
UNIT-II
(Demand and Supply)
MODULE- 5: CONCEPTS OF DEMAND
CONTENTS
5.0: Objectives
5.01: Short run and Long run demand
5.01: Individual and Market demand
5.02: Segmented market and total market demand
5.03: Company and industry demand
5.04: Direct and derived demand
5.05: Autonomous and induced demand
5.06: Perishable and durable goods demand
5.07: Domestic and industrial demand
5.08: New and replacement demand
5.09: Final and intermediate demand
5.10: Change in quantity demanded and demand.
5.11: Summary
5.12: References
5.13: Self Assessment Test
5.0: OBJECTIVES:
In module -1 and 2 of Unit –II we discussed the types or kinds of demand
for example: Price, income, cross and promotional demand. The objective
of this module is to present different concepts of demand. After reading
this module you should be able understand the meaning of:
Short run and long run demand

Individual and Market demand
Segmented market and total market demand
Company and industry demand
Direct and derived demand
Autonomous and induced demand
Perishable and durable goods demand
Domestic and industrial demand
New and replacement demand
Final and intermediate demand
Change in quantity demanded and demand.
5.01: Short run and Long run Demand:

Short run demand may be taken to mean immediate, existing demand
which is based on given tastes and preferences, available technology and
given economic environment. Long run demand on the other hand refers to
size and pattern of demand, which is likely to prevail in future as a result of
changes in technology, tastes, product improvement and promotional
efforts and such other factors where adjustments take place over a period
of time. Price, income fluctuations are more relevant as determinants of
short run demand, while changes in food habits, urbanization, work culture
etc must be considered for long run demand analysis.
5.02: Individual and Market demand:

Individual demand indicates the purchase pattern of an individual or a
consumer at different prices. The individual demand schedule gives us
information related to purchase pattern of a consumer at different prices.
For example:
Price of X commodity Quantity demanded

(Rs) (Units)
1 10
2 9
3 8
4 7
5 6
The above shown demand schedule indicates quantity demanded of a

commodity by a particular consumer corresponding to different prices.
But the reality is that a market is visited by large number of consumers with
varying degree of income, tastes, age, etc. As a result the business firm
must have an idea about the market demand for the commodity in order to
arrive at optimal decisions regarding the level of out put to be produced.
Because these different consumers react differently to the prevailing
market price of a commodity. By constructing individual demand schedules
and through horizontal summation of individual demand of different
consumers at any given price, we can arrive at market demand for the
product. The market demand schedule represents aggregate purchase
behavior of consumers in the market. We can understand derivation of
market demand schedule as shown below.
Price of X Quantity Quantity Market

demand
Commodity purchased purchased (A+ B)
by A by B
10 10 20 30
9 20 30 50
8 30 40 70
6 40 50 90
5 50 60 110
This example is given by assuming there are two consumers for X

commodity. In fact there are millions of consumers for any product. To
simplify the analysis we have taken into account two consumers. In the
above table the market demand is arrive at by adding together individual
demand at any given price. For example at price Rs 8, the quantity
purchased by consumer A is 30 units while B is 40 units. Therefore the
market demand is 30 + 40 =70 units. In this way we can find out market
demand for the commodity at any given price. Like individual demand
curve the market demand curve also slopes downward from left to right.
GRAPH- 1
Y ‘A’ Y ‘B’ Y
DM (A+B)
D DB
A 10
Price
10
Price
Price
DM
8
8 8
DB
DA
Here DA is the demand curve of Consumer ‘A’
DB is the demand Curve of Consumer ‘B’
DM is the demand Curve of total market i.e A+B
5.03: Segmented market and Total Market Demand:
Segmented market demand indicates the demand for a product in one

segment i.e one part of the market. A business firm may place its
commodity in different geographic locations across the world. For example:
Domestic market and foreign market. Hindustan Machine Tools sell its
commodity i.e watches, in domestic as well as foreign market. The demand
for its product in domestic market and foreign market separately constitute
segmented market demand. On the other hand the demand fro its product
in domestic and foreign market together represents total market demand.
Through horizontal summation of segmented market demand at any given
price, we can arrive at total market demand. Total market consisting of
varying degrees of income, tastes and preferences, traditions, external
environment etc represent aggregate picture of demand for the product of
a firm . This we can understand with the following example.
Price of Demand Demand Total Market

demand
Watches in domestic in foreign (Domestic +
Foreign)
( Rs) Market Market
10000 10 20 30
9000 20 30 50
8000 30 40 70
6000 40 50 90
5000 50 60 110
5.04: Company and Industry Demand:
An industry is the aggregate of firms/companies. We generally come across

the words: software industry, iron and steel industry, cement industry etc.
For example: in software industry Micro Soft, Wipro, Satyam, TCS, and
many other companies are there. The demand for software products of a
particular firm represents company demand. The demand for software
products of all firms together represents industry demand. Each and every
company must have an idea about the movement of industry demand to
know trend o demand fro its product. Through horizontal summation of
company demand, we can derive the industry demand. The derivation
process of industry demand is same as that of the derivation process of
total demand and market demand.
ACTIVITY-1
1. Is there any difference between company and industry?. If ‘yes’
explain it.
2. How do you do you find out total market demand for software
professionals?
5.05: Direct and Derived:

Direct demand refers to demand for goods meant for final consumption. It
is the demand for consumer goods such as food items, readymade
garments, cigarettes etc. On the other hand, derived demand refers to
demand for goods which are needed for further production. It is the
demand for rawmaterials and factors of production like labour. Thus
demand for inputs or factors of production, is a derived demand. The
demand for rawmaterial depends on the demand for output where
rawmaterials are used to produce that output.
5.06: Induced and Autonomous:

When the demand for a product is influenced by the demand for some
other product, it is called as induced demand. For example: the demand
cement, iron and steel is generally influenced by demand housing or
construction. So the demand for these commodities is induced in nature.
The demand for all complementary goods such as tea-sugar, bread-butter,
automobiles and petrol etc is induced demand. Autonomous demand is not
derived or induced. It is independent demand. Though theoretically we can
speak of autonomous demand but in reality the demand for all
commodities is derived/ induced. In the context of demand analysis, for the
estimation of demand, economists use the demand function Qd = a – bPx.
Here ‘a’ is the autonomous component and ‘b’ is the induced component of
demand.
5.07: Perishable goods and Durable goods Demand:

The demand for bread, rawmaterial like cement which can be used only
once, is called perishable demand. The same unit of these goods cannot be
used repeatedly. On the other hand the demand for capital goods such as
machinery, car, consumer goods such as shirt, television, is called durable
goods demand. The owner of these commodities can put these
commodities in use repeatedly.
5.08: Domestic and Industrial Demand:

The internal demand for firms’ product is called domestic demand. The
external demand for firm’s product is called industrial demand. Assume
that Tata Company produced 10 million tonnes of steel in the year 2010.
Out of the total 10 million tones, its internal demand was 2million tonnes.
This is called domestic demand. The demand from other industries in the
economy was 8 million tones. This is called industrial demand.
5.09: New and Replacement Demand;

If the purchase of an item is meant as an addition to stock, it is new
demand. For example: the demand for latest model a television. Constitute
new demand. On the other hand the demand spare parts represent
replacement demand.
5.10: Final and intermediate demand:

Demand for final product such paint represents final demand. Where as
the demand for intermediate products such as chemicals, which are used as
input in the production of paint to improve the quality of paint, is called as
intermediate demand.
5.11: Change in quantity demanded and change in demand:
Change in quantity demanded is always with reference to a movement

along the same demand curve. The change in purchases of a consumer due
to change in price, ceteris paribus, is called as change in quantity
demanded. This is denoted in terms of either extension in demand or
contraction in demand. On the other hand, change in demand is always
with reference to a shift in demand curve. The change in purchases of a
consumer due to change in other than price, for example income, given the
price, is called as change in demand. This is denoted in terms of either
increase in demand or decrease in demand.
1. What do you understand by domestic and industrial demand?

2. Provide examples for replacement demand.
5.12: Summary
In this module an attempt is made to familiarize to you the various
concepts of demand.. The market demand concept helps the management
to identify the nature of total market demand for their product. Further the
management can find out the nature of the product i.e. intermediate or
final,they are producing. The understanding of these concepts helps the
management to arrive at optimal decisions
5.13: References:
1. R.L Varshney and Maheswari : Managerial economics.
2. Mote,V.L; Samuel Paul and G.S.Gupta : Managerial Economics,
concepts
and cases.
3. Koutsoyiannis : Modern Micro Economics

1. Discuss different concepts of demand and comment on their usefulness
to the management in arriving at optimal decisions.
UNIT-II
(Demand and Supply)
MODULE- 6: LAW OF SUPPLY
Notes:
CONTENTS
6.0: Objectives
6.01: Introduction
6.02: Meaning of Supply
6.03: Supply function
6.04: The law of supply
6.05: Extension and contraction in supply
6.06: Increase and decrease in supply
6.07: Summary
6.08: References
6.0: OBJECTIVES:
The objective of this module is to explain the meaning of supply,
determinants of supply and elasticity of supply. After reading this module,
you should be able to understand:
The meaning of supply

The Law of Supply
Extension and Contraction in Supply
Increase and Decrease in Supply
6.01: Introduction:
In economics the word supply is used to show the relationship between
change in independent variable i.e. price and consequent change in the
dependent variable i.e. quantity of a commodity that would be supplied.
The supply of a commodity at different prices, indicates the behavior of a
rational supplier involved in supplying a commodity. The supply of a
commodity reflects the quantity of a product is available to consumer at
any given point of time.
6.02: Meaning of supply:

The quantity of a commodity that would be offered for sale at a given price,
at a given point of time and in a given place is known as ‘supply’ of a
commodity. We can understand the meaning of supply with an example:
Example: A farmer produced 100 bags of paddy. Out of these 100 bags, he
retained 30 bags with him and offered for sale 70 bags at given price.
Quantity offered for sale is the ‘supply of paddy’ and 100 bags are the total
output or production. So whatever the quantity offered for sale is known
as supply.
6.03: Supply function:

The supply of a commodity is influenced by large number of factors. These
are called determinants of supply. When we write determinants of supply
in the form of an equation, it is called supply function, which is shown
below.
Sn = f ( Pn, Pf, T, O, . …..)
In the supply function Sn is the dependent variable and Pn, Pf,T, O, are
independent variables.
6.04: Law of Supply:

In the supply function we have identified Pn, Pf, T, O, . as the determinants
of supply. In reality we know that the changes in all independent variables
influence the supply of a commodity. For analytical simplicity, while
analyzing the supply of a commodity, we assume other things remaining
constant, except price of the commodity under observation. In such a case
we can write the simplified supply function as:
Sn = f ( Pn).
The function tells us that the supply of ‘n’ commodity depends on price of
‘n’ commodity. If that is the case, there exists direct relationship between
price of ‘n’ and supply of ‘n’, other things remaining constant. That is as
price of ‘n’ rises the supply of ‘n’ goes up and as the price of ‘n’ falls; the
supply of ‘n’ goes down. This relationship between price and supply is
known as ‘Law of Supply’.
Individual Supply schedule:

This consists of different quantities of a commodity offered for sale by a
supplier at different prices. The supply schedule is shown below.
Price of ‘n’ (Rs) Supply of ‘n’ ( Units)
10 50
20 60
30 70
40 80
50 90
60 100
The supply schedule shown above reveals the direct relationship between
price of ‘n’ and supply of ‘n’. As price rises from Rs 10 to Rs 20 the supply
increased from Rs 50 to Rs 60 units and as price rises from Rs 20 to Rs 30
and up to Rs60 the supply increased from 60 to 100 units.
Individual Supply curve:
It is the graphic representation of individual supply schedule. While drawing

the supply curve we measure supply on X axis and price on Y axis. The
shape of normal supply curve is shown below.
GRAPH-1
a
Price
Supply
The basic feature of supply curve is that it slopes upward from left to right.
This reveals the fact that, the quantity supplied is directly related to price.
The supply curve shown above indicates the quantity offered for sale by a
single supplier at different prices.
Statistical Supply function:

We can use the linear supply function Qs = a +bPx to estimate change in
supply as a result of given change in price. Assume that the estimated
supply function is Qs = 5 + .5 Px. With the help of this supply function we
can con construct supply schedule as shown below.
Price of ‘X’ (Rs) Supply of ‘X’ (Units)
1 5.5
2 6.0
3 6.5
4 7.0
5 7.5
With the help of above information we derive the supply curve as shown
below.
GRAPH-2
Y
S
Qs = 5 + .5Px
Price
S
Market Supply Schedule:
In the market there may be more than one supplier for a product. The
market supply schedule consists of quantity of a commodity supplied by
different individual suppliers at different prices. By adding the supply of
individual suppliers at a given price, we can get market supply of a
commodity. Assuming there are two suppliers for a product, a hypothetical
market supply schedule is given below.
Price of Supply of A Supply of B Market Supply

(Rs) (Units) (Units) A+B (Units)
1 10 20 30
2 20 30 50
3 30 40 70
4 40 50 90
5 50 60 110
Market Supply Curve:
The market supply curve is the graphic representation market supply

schedule. We can derive the market supply curve through horizontal
summation of individual supply curves.
GRAPH-3
Y SA Y Y
SB
5 5
5
Price
2
2
S
Price
A SM
SB
0 20 50 30 60 X
X
Supply of A Supply of B
In the above diagrams SA, SB are the individual supply curves. SM is the
market supply curve. At price Rs 2, supplier A offered 20 units, B offered 30
units. Therefore, market supply at Rs2 is 20+30 =50 units. In the same way
at price Rs 5, A offered 50 units while B offered 60 units. Therefore the
market supply is 110 units.
ACTIVITY -1
1. Spell out the meaning of supply.
2. Show the difference between individual and market
supply.
3. Given the supply function Qs =10 + .8 Px, estimate
supply at different prices.
Exceptions to the Law of Supply:

Law of supply i.e the existence of direct relationship between price and
supply, given other things, may not hold good, with respect to all types of
commodities or factors of production. With respect to the supply of factors
of production, we may observe an inverse relationship between price and
supply beyond a point of rise in price of factors of production. Such an
inverse relationship is an exception to the law of supply.
1. Incase of labour supply, the law of supply does not hold good at all
prices. Labour supply i.e. in terms of number of hours a worker wants to
work in a single day. Initially increases as the price of labour i.e the wage
rate per hour, increases. But beyond a point, if price of labour increase,
supply of labour is likely to decrease. This is based on the assumption that
workers have fixed money needs. Due to this, when wage increase, workers
can earn adequate amount of income, even by working less number of
hours. As a result of this, labour supply curve, generally, bends backwards
as shown below.
GRAPH-4
Y
S
Backward bending supply curve

W3
W2
Wage per hour
W
1 S
L0 L2
X
L1
Labour Supply (in hours)
According to the above diagram OL1 is the supply of labour corresponding
OW1 wage rate per hour. As the wage rate increased to W2, supply of
labour increased to OL2. Further if the wage rate increased from W2 to W3,
number of hours offered for work by a worker decreased from OL2 to OL0.
This reveals the fact that at higher wage rate i.e. OW3, workers offered less
number of hours for work. This goes against the law of supply and hence an
exception.
2. Expectations regarding future price may also lead to invalidity of the law
of supply. If the suppliers expect that in near future, price is going to fall
below present prices; suppliers may offer large quantities for sale, even
though the present price is less than the previous price. In this case also, we
can see the presence of inverse relationship between price and quantity
supplied.
ACTIVITY-2
1. What do you understand by backward bending supply curve?
6.05: Extension and contraction in supply:

This refers to a movement along the supply curve. Change in supply as a
result of change in price, other things remaining constant, is either called
an extension or contraction in supply. Extension and contraction is to be
shown on the same supply curve through different points.
GRAPH-5
P2
P1 A
C
P0
Price
S
X
0
According to above diagram, at price OP1, suppliers are supplying Q1
quantity corresponding to point A on supply curve SS. As price increases to
P2, suppliers are supplying Q2 quantity corresponding to point B on SS. The
forward movement from A to B on SS supply curve is known as extension in
supply. As the price decreases from P1 to P0, suppliers supply Q0 quantity
corresponding to point C on SS supply curve. The backward movement on
supply curve, from A to C is known as contraction in supply.
6.06: Increase and decrease in supply:

This refers to shift in supply curve either to right or to left of the original
supply curve. Given the price, if there is change in other factors influencing
the supply, the resulting change in supply is to be shown through a shift in
supply curve.
Y
GRAPH-6
S
S1
A B
P1
S
Price
S1
X
0 Q1 Q2
Supply
In the above diagram SS is the initial supply curve. Point A on S indicates
Q1 quantity supplied, corresponding to P1 price. Given the price, if there is
a change in other things i.e fall in cost of production, suppliers may offer
more than q1 quantity. In such a case supply curve shifts to the right of the
original SS curve and becomesS1S1. Point B on S1S1 indicates Q2 quantity
corresponding to P1 price due to change in other factors influencing supply.
Change in supply from Q1 to Q2 at the same price is known as increase in
supply.
GRAPH-7
Y S1
S
P1 B A
S1
S
Price
0 Q0 Q1
Supply
In the above diagram SS is the initial supply curve. Point A on S indicates Q1

quantity supplied, corresponding to P1 price. Given the price, if there is a
change in other things i.e increase in cost of production, suppliers may offer
less than Q1 quantity. In such a case supply curve shifts to the left of the
original SS curve and becomes S1S1. Point B on S1S1 indicates Q0 quantity
corresponding to P1 price due to change in other factors influencing supply.
Change in supply from Q1 to Q0 at the same price is known as increase in
supply.
ACTIVITY-3
1. How do you show extension and contraction in

supply?
2. How do you show increase and decrease in supply?
6.07: Summary
The word ‘supply’ is used to show the directional relationship between

price and quantity of a commodity or factor offered for sale at a given price
and at a given point of time. Other things remaining constant, there exists
direct relationship between price and supply. This direct relationship
between price and supply is known as the ‘law of supply’. Extension and
contraction in supply refers to a movement along the supply curve.
Increase and decrease in supply refers to shift in supply curve.
6.08: Reference:

2. Mote,V.L; Samuel Paul and G.S.Gupta : Managerial Economics,
concepts
and cases.
1. Discuss the law of supply. Explain its exceptions.

UNIT-II
(Demand and Supply)
MODULE-7: ELASTICITY OF SUPPLY AND
DETERMINATION OF EQUILIBRIUM PRICE.
CONTENTS
7.0: Objectives
7.01: Elasticity of Supply
7.02: Degrees of Elasticity of Supply
7.03: Measurement of Elasticity of Supply
7.04: Estimation of Elasticity of Supply
7.05: Determination of Equilibrium Price
7.06: Summary
7.07: References
7.0: OBJECTIVES:
The objective of this module is to explain the meaning of elasticity

of supply and its measurement. After studying this module you
should be able to understand the:
Definition of elasticity of supply

Different degrees of elasticity of supply
Measurement of elasticity of supply
Determination of equilibrium price
7.01: Elasticity of supply:

In general elasticity refers to degree of responsiveness in
dependent variable as a result of given proportionate change in the
dependent variable. We can define elasticity of supply as the ratio
between proportionate change in supply of a commodity to a given
proportionate change in price of that commodity.
NOTE-1
Elasticity of supply =
This we can write as
= X
Here is equal to the slope of supply curve or rate of change in

supply. is the ratio between price and supply.
7.02: Degrees of Elasticity of Supply:
Based on the value of elasticity of supply, it is divided into

different degrees. They are:
1. Perfectly Elastic supply
If the proportionate change in the supply of a commodity is

infinite or so large with reference to an insignificant or zero
percentage change in price, it is known as perfectly elastic supply.
In this case, the value of elasticity will be equal to infinity and the
supply curve will be parallel to horizontal axis as shown below.
GRAPH-1 Y
Ye = ∞ S
Price
X
0 Supply
Perfectly Inelastic Supply:
If the supply is totally non-responsive to a given percentage change

in price, it is known as perfectly inelastic supply. In such a case the
value of elasticity will be equal to zero and the supply curve is
parallel to vertical axis as shown below.
GRAPH-2
S
Y
Ye = 0
Price
Unitary Elastic Supply:
If the proportionate change in the supply of a commodity is equal

to proportionate change in price, it is known as unitary elastic
supply. In this case, the value of elasticity will be equal to one and
the supply curve is a straight line passing through the origin as
shown below.
GRAPH-3
Y S
Ye = 1
S
Price
Supply
Relatively Elastic Supply:

If the proportionate change in the supply of a commodity is more
than the given proportionate change in price, it is known as
relatively elastic supply. In this case, the value of elasticity will be
equal greater than one (1) and the supply curve is as shown below.
GRAPH-4
Y
S
Ye > 1
S
Price
Supply
Relatively Inelastic Supply:
If the proportionate change in the supply of a commodity is less

than the proportionate change in price, it is known as relatively
inelastic supply. In this case, the value of elasticity will be less
than one and the supply curve is as shown below.
GRAPH-5
Y S
Ye<1
ice
ACTIVITY-1
1. Define elasticity of supply.
2. Define unitary elastic supply.
7.03: Measurement of Elasticity of Supply:
Two methods are generally used to measure supply elasticity. They

are;
1. Mathematical Method
2. Graphic Method.
Mathematical Method:
By using this method it is possible to find out the exact value

supply elasticity. We can understand this method with the help
of following example.
At price Rs.5, suppliers offered 100 units for sale and at price
Rs 10 they offered 300 units. Supply elasticity is
NOTE-2
S = 100 units
= 300 – 100
= 200 units
P = Rs 5
= 10 – 5
= Rs 5
= X
By substituting the values in the above principle we can get
the value of supply elasticity.
Elasticity of supply = X =2
Value of elasticity 2 means 1% change in price causes 2% change

in supply. This is a case of relatively elastic supply.
Graphic Method:
By using this method, we can say whether the elasticity is high or

low. Measurement of elasticity, using graphic method is explained
below.
GRAPH- 6
Y S
G R
P
In the above diagram AS is the supply curve. The measurement of
elasticity of supply at point P is shown below.
NOTE- 3
Elasticity of supply at point P = X
= X
Since QS = PT and GH = RT we can write this as
= X
AQP and PTR are similar triangles, have the ratio or proportion of
sides are equal that is to say
= =
Therefore elasticity of supply = X
The value of indicates the elasticity of supply at point ‘P’ on

AS. In the above diagram
AQ < OQ. Therefore < 1. This is a case of relatively inelastic

supply at price OH.
GRAPH- 7
Y
S
R
G
P
H T
Price
X
0 A Q M
Supply
AQ
In the above graph, the elasticity of supply at point ‘P’ = -----.
According to the
OQ
AQ
Diagram AQ is equal to OQ. Therefore ------ i.e the value of
elasticity
OQ
is equal to one(1). This is a case of unitary elastic supply.
GRAPH-8
Y S
R
G
H P T
Price
X
-x
A 0 Q M
Supply
In the above graph, the elasticity of supply at point ‘P’ = AQ/OQ .

According to the
AQ
Diagram AQ is greater than the OQ. Therefore ------ i.e the value
of elasticity
OQ
Is greater than one (1). This is a case of relatively elastic supply.
ACTIVITY-2
1. Show the relatively elastic supply with graphic method.
7.04: Estimation of Elasticity of Supply:
Using the linear supply function Qs = a + bPx, we can find out

elasticity of supply at any given price. For example the estimated
supply function is
Qs=5 +.5 Px. At price Rs 10 find out supply elasticity.
NOTE-4
7.05: Determination of equilibrium price:
Equilibrium price is determined at a point where demand is equal

to supply. This we can understand with the following example.
The given estimated demand function is Qd = 10 - .5 Px, Where as

the given supply function is Qs= 5 + .5Px. When Qd = Qs then we
can identify the equilibrium price. Now we shall equate Qd with
Qs to identify price.
10- .5Px = 5+ .5Px
10 – 5 =. 5Px + .5 Px
5 = Px
So the equilibrium price is Rs 5. Equilibrium price implies the

price that equates demand with supply. Given the demand and
supply functions at price Rs 5, the demand = 7.5 units and the
supply = 7.5 units.
GRAPH- 9 Y S
D
5 E
D
Price
X
0 7.5
Demand & supply
ACTIVITY -3
1. Given the Qd = 20 - .5Px and Qs = 10 + .5Px, find out

equilibrium price. Estimate equilibrium demand and supply.
7.06: Summary:
Elasticity of supply refers to degree of responsiveness in supply as

a result of given proportionate change in price. It is the ratio
between proportionate changes in supply to proportionate change
in price. Mathematical and graphical methods can be used to
estimate elasticity of supply. The equality between demand for and
supply of a commodity determines the equilibrium price.
7.07: References:

2. Mote,V.L; Samuel Paul and G.S.Gupta : Managerial
Economics, concepts and cases.
5. H.L.Ahuja :Advance Economic Theory
1. Define and discuss elasticity of supply.

2. How do you measure supply elasticity using graphic method?
UNIT-II
(Demand and Supply)
MODULE- 8: DEMAND FORECASTING
CONTENTS
8.0: Introduction
8.01: Objectives
8.02: Meaning of demand forecasting
8.03: Need for demand forecasting
8.04: Types of fore casting
8.05: Steps in demand forecasting
8.06: Techniques of demand forecasting
8.07: Summary
8.08: References
8.0: INTRODUCTION:
Most business decisions are made in the face of risk and
uncertainty. One of the crucial aspects in which managerial
economics differs from pure economic theory lies in the treatment
of risk and uncertainty. Traditional economic theory assumes a risk
free world of uncertainty. But the real world business is full of all
sorts of risk and uncertainty. The element of risk associated with
future is indefinite and uncertain. To cope with risk and
uncertainty, the manager needs to fore see the the course of
variables. The likely future course of variables has to be given
form.i,e forecasting. The aim of economic forecasting is to reduce
the risk or uncertainty that the firm faces in its short- term
decision making and planning for its future growth.
8.01: Objectives:
The objective of this module is to explain different methods of
demand forecasting. After reading this module you should be able
to understand the:
Meaning of forecasting
Need for demand forecasting
Types of forecasts
Steps in demand forecasting
Methods of forecasting
8.02: Meaning of demand forecasting:

Dealing with business, a manager is concerned with problems
faced in immediate present, but cannot ignore the future. The
decision that a manager takes in the present implies a course of
action and reaction in the future. If the manager is concerned with
future event, its order, intensity, he is concerned with future
prediction. If he is concerned with future course of variables, for
example: demand, price, profits, he can project the future.
Projection is of two types. They are forward and backward. It is the

forward projection of data variables, which is named forecasting.
8.03: Need for demand forecasting:

Sales constitute the primary source of revenue for the business
firm. Thus sales forecasts are needed for production planning,
inventory planning, profit planning etc. Production requires
support of men, material, machines, money which will have to be
arranged. Thus man power planning, replacement; new investment
planning, working capital management and financial planning etc
depend on sales forecasts. Thus demand forecasting is crucial for
corporate planning. The survival and growth of business firm has
to be planned, and for this sales forecasting is the most crucial
activity. The purpose of forecasting in general is not to provide an
exact future data with perfect precision. The purpose is just to
bring out the range of possibilities concerning the future under a
given set of assumptions.
8.04: Types of forecasts:

1. Economic and non-economic:
The future course of economic variables such as
demand, prices, profits etc is called economic forecast. On
the other hand crime rate forecast, population forecast,
election result forecast etc are called non-economic
forecasts.
2. Micro and macro forecasts:

Micro forecasts are at the level a business form i.e.
future sales of a particular firm. At the economy level five year
plan projections i.e agricultural production, employment etc are
macro forecasts.
3. Active and passive forecasts:

If the firm extrapolates the demand of previous years to
get the likely demand figures for the future, it is an example
of passive forecast. If the firm is interested in conducting the
demand forecasting exercise afresh in the light of changes in
prices, product diversification etc, is an example of active
forecast.
4. Short-run and long-run forecasts:

If the forecasts are conducted, assuming technology,
tastes and preferences constant, they are called short-run
forecasts. On the other hand, if the firm takes in to consideration
changes in population, technology, tastes of consumers etc in
projecting future sales then it is called long-run forecast.
5. Conditional and non -conditional Forecasting:

If a firm conducts forecasts assuming other things
remaining constant except for example price, it is called
conditional forecast. When we relax the assumption and
estimate the future course of sales in the light of changes in all
the independent variables, they are called non-conditional
forecasts.
8.05: Steps in demand forecasting:

1. Nature of forecast:
The business firm should be clear about the use of forecast
data. At the same time it has to state it objective in terms of
time period i.e. short run or long run.
2. Nature of product:
Firm has to identify the nature of product for which it is
attempting demand forecasting exercise. Nature of product
indicates whether the firm is producing final product like
food, or intermediary product like chemical which is to be
used as an input in final product such as paint.
3. Life cycle of the product:

Before conducting demand forecasting study, firm should
take into account the age of the product and its stage in the
product life cycle. If the product is in the initial years of life
cycle, forecast may show an upward trend, if it is in the last
years, forecast may show downward trend etc.
4. Identification of determinants:
Business firm has to identify the determinants such as price,
income, promotional expenditure,etc.
5. Analysis of determinants:
Researcher has to analyse all those determinants as whether
they are cyclical, seasonal or random variables.
6. Choice of technique:
To conduct the analysis of demand forecast, researcher may
use different techniques. But the choice of appropriate
technique depends on the nature of the product. The
accuracy and relevance of forecast data depends on the
choice of technique.
7. Testing of accuracy:
The testing is needed to reduce the margin of error and there
by improve its validity for practical decision making
purpose.
8.06: Techniques of demand forecasting:

Broadly speaking there are two approaches to demand forecasting.
They are (1). Collect information about the likely purchase
behavior of consumer through conducting opinion polls or
interviews. (2). Use past experience as a guide through a set of
statistical techniques. Now we shall try to understand these
techniques.
Survey method:
Consumer survey: Under this method, business firm can collect in
formation from census of population or from sample population.
Through personal interviews it can collect consumers’ preferences
regarding their product. Census method, in general, yield reliable
results compare to sample method. But census method needs more
time and money compared to sample method. Depending up on the
need and resources at the disposal of firm it has to choose between
sample and census method.
Experts’ opinion method:

It consists of an attempt to arrive at a consensus in an uncertain
area by questioning a group of experts repeatedly until the
response appears to converge along a single line or issues causing
disagreement are clearly defined. The participants are provided
with responses to previous questions from others in the group by a
coordinator. This is also known as Delphi method.
Collective opinion method:

This method also called sales force polling. Under this method
salesmen are expected to estimate future sales in their respective
areas. The rationale of this method is that, salesmen being closest
to the consumer are likely to have the most intimate feel of the
market i.e. customers reaction to the products of the firm and their
sales trends. The estimates of individual salesmen are consolidated
to find out the total future sales. Then, these estimates are reviewed
to eliminate the bias of optimism on the part of some salesmen and
pessimism on the part of others. These are further examined in the
light of proposed changes in price, advertisement expenditures,
income, etc.
Time series and trend projection:

A firm which has been in production process for some time
generally accumulates data related to price and corresponding
sales. Such data when arranged in a chronological order yields the
time series. The time series relating to sales represent the past
pattern of effective demand for a particular product. Such data can
be presented either in tabular form or graphical for further analysis.
The most popular method of analysis of time series is to project
the trend of the time series. A trend line can be fitted through a
series by means of statistical techniques such as method of least
squares. The trend line then projected into the future by
extrapolation.
Example: NOTE-1
Use of economic indicators (Barometric) method:

This method is useful to forecast cyclical swings in economic
activity or business cycles. Under this method we have to identify
leading economic indicators. These are time series that tend to
precede or lead changes in general economic activity, like changes
in the mercury in a barometer precede weather conditions, hence it
is called barometric method.
For the use of this method, the following steps have to be taken.
1. See whether a relationship exists between the demand for a
product and certain economic indicators.
2. Establish the relationship through the method of least squares
and derive the regression equation. Assuming the relationship to be
linear, we can write the equation as Y = a + b X
3. Once the regression equation is derived, the value of Y(
dependent variable) can be estimated for any given values of X.
Example:- NOTE -2
Controlled Experiments:
Under this method an effort is put to vary separately certain
determinants of demand which can be manipulated for example:
price, income, advertisement expenditures etc and conduct
experiments assuming other factors remaining constant. Thus, the
effect of demand determinants like price, advertisement etc can be
assed by either varying them over different markets or by varying
them over different time periods in the same market.
Judgmental Approach:
Management may have to use its own judgment when (a) analysis
of time series and trend projection is not feasible because of wide
fluctuations in sales; (b) use of regression method is not possible
because of lack of historical data. Further, even when statistical
methods are used, all such method cannot incorporate the potential
factors affecting the demand for example a major technological
break through in the product design. Statistical forecasts are more
reliable for larger levels of aggregations. As a result there is need
for use wisdom by the management to supplement statistical
techniques.
Smoothing techniques:
These predict future values of a time series on the basis of some
average of its past values only. Smoothing techniques are useful
when the time series exhibit little trend or seasonal variations.
There are two different smoothing techniques. They are:
(a). Moving Averages: In this method the forecasted value of a
given period is equal to the average value of ( year or quarter or
month) time series in a number of previous periods.
(b). Exponential smoothing:
In exponential smoothing method, the forecast for period t+1 is

a weighted average of actual and forecasted values of the time
series in period t.
8.07: Summary:
In this module we discussed the meaning and importance of
demand forecasting and types of forecasts and techniques of
forecasts. There is no unique method demand forecasting.
Business firm has to choose the right technique depending upon
its objectives, nature of the product and life cycle of the product
and the resources at its disposal, urgency of forecasts.
8.08: References:
1. Dominick Salvatore: Managerial Economics in a Global
Economy
2. R.L.Varshney and Maheswari: Managerial Economics
3. William F.Samuelson : Managerial Economics

Stephen G.Marks
8.09:Self Assessment Test:
1. Discuss the importance of demand forecasting.
2. Given the information related to sales with respect time

find out projected sales in the year 2015.
Year Sales
(In lakh units)
2000 100
2001 125
2002 90
2003 140
2004 180
2005 120
2006 80
2007 200
2008 190
2009 220
3. Given the information related to agricultural income and

demand for tractors in different years find out future demand
for tractors at agricultural income Rs.200 crores.
Year Agricultural Income
Sales of Tractors
In Rs. Crores
(in thousands)
2005 50
20
2006 60
25
2007 45
15
2008 80
30
2009 100
60
2010 140
75

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UNIT-II

(Demand and Supply)

1.0: INTRODUCTION: In economics the use of the word demand is made to

1.01: OBJECTIVES: The objective of this module is to explain the meaning of

The meaning of demand

1.02: MEANING OF DEMAND:

Generally speaking, by demand we mean effective demand. Demand becomes

1.03: DEMAND FUNCTION:

DX = f (PX PSC Y, T, AE, W . . . . . . .)

In the above function

DX = Demand for commodity -X (Dependent variable)

1.04: TYPES OF DEMAND:

DX = f (PX PSC Y, T, AE, W . . . . . . . )

1.06: DEMAND SCHEDULE:

Price of X commodity Demand for X

1.07: INDIVIDUAL DEMAND CURVE:

1.08: ESTIMATION OF DEMAND:

Based on this information we can derive demand curve as shown below.

1. What is the meaning of demand?

1.09: REASONS FOR NEGATIVE SLOPE OF THE DEMAND CURVE:

1. Law of Diminishing Marginal Utility:

Economists, who believe in cardinal utility concept, say that diminishing

As the price of a commodity falls, the real income of a consumer increases in

When the price of a commodity is reduced, then a large number of new

5. Different uses of the commodity:

1.10: EXCEPTIONS TO THE LAW OF DEMAND:

1.12: ADDITIONAL REFERENCES:

1.13: SELF ASSESSMENT TEST:

MODULE- 2: INCOME AND CROSS DEMAND.

Meaning of income, cross and promotional demand

2.02: INCOME DEMAND:

The general demand is DX = f ( PX PSC Y, T, AE, W . . . . . . . )

In the above function

Y1 Income demand Curve

As shown in above diagram, original level of income is OY1 and corresponding

ESTIMATION OF INCOME DEMAND:

203: CROSS DEMAND:

In the above function

DA = Demand for commodity - A (Dependent variable)

Substitutes: If two commodities are substitutes, then we can use A commodity

Cross demand curve for

ESTIMATION OF CROSS DEMAND:

We can show the relationship between advertisement expenditures and sales

2.06: Increase and decrease in demand:

2.08: ADDITIONAL REFERENCES:

2.09: Self Assessment Test:

3.02: MEANING OF ELASTICITY:

Proportionate change in the dependent variable

3.03: PRICE ELASTICITY OF DEMAND:

Proportionate change in quantity demanded

This we can write as

Use notations for

Now we can write the price elasticity as =

1.Perfectly elastic demand: If an insignificant or near zero percentage change in

If the proportionate change in quantity demanded is exactly equal to

Price elasticity = 1 (one)

5. Relatively inelastic demand:

1. Define elasticity of demand.

MEASUREMENT OF PRICE ELASTICITY:

Now we try to understand each one of the above methods.