Scribd
Upload
43 views2 pages

20bsp2726 VB

Price elasticity of demand measures the responsiveness of quantity demanded to a change in price. Managers consider price elasticity when setting prices, as revenue will increase if demand is inelastic but decrease if it is elastic. The shape and position of the demand curve can change due to factors like income, substitute goods, and expectations. A budget constraint shows the combinations of goods that can be purchased given income and prices, and it will shift inward with decreasing income or increasing prices of goods.

Uploaded by

KSHITIZ GUPTA
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
43 views2 pages

20bsp2726 VB

Price elasticity of demand measures the responsiveness of quantity demanded to a change in price. Managers consider price elasticity when setting prices, as revenue will increase if demand is inelastic but decrease if it is elastic. The shape and position of the demand curve can change due to factors like income, substitute goods, and expectations. A budget constraint shows the combinations of goods that can be purchased given income and prices, and it will shift inward with decreasing income or increasing prices of goods.

Uploaded by

KSHITIZ GUPTA
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

1.

Price elasticity of demand is the percentage change in the quantity demanded


of a good or service divided by the percentage change in the price.
The concept of elasticity of demand plays a crucial role in the pricing decisions of
the business firms and the Government when it regulates prices. The concept of
price elasticity is also important in judging the effect of devaluation or
depreciation of a currency on its export earnings.
The Manager take into account the price elasticity of demand when they take
decisions regarding pricing of the goods. This is because change in the price of a
product will bring about a change in the quantity demanded depending upon the
coefficient of price elasticity.
This change in quantity demanded as a result of, say a rise in price by a firm, will
affect the total consumer’s expenditure and will therefore, affect the revenue of
the firm. If the demand for a product of the firm happens to be elastic, then any
attempt on the part of the firm to raise the price of its product will bring about a
fall in its total revenue.
Thus, instead of gaining from the increase in price, it will lose if the demand for its
product happens to be elastic. On the other hand, if the demand for the product
of a firm happens to be inelastic, then the increase in price by it will raise its total
revenue. Therefore, for fixing a profit-maximizing price, the firm cannot ignore
the price elasticity of demand for its product.
2. The shape and position of the demand curve can be impacted by several
factors. Rising incomes tend to increase demand for normal economic goods, as
people are willing to spend more. The availability of close substitute products that
compete with a given economic good will tend to reduce demand for that good,
since they can satisfy the same kinds of consumer wants and needs. Conversely,
the availability of closely complementary goods will tend to increase demand for
an economic good, because the use of two goods together can be even more
valuable to consumers than using them separately, like peanut butter and jelly.
Other factors such as future expectations, changes in background environmental
conditions, or change in the actual or perceived quality of a good can change the
demand curve, because they alter the pattern of consumer preferences for how
the good can be used and how urgently it is needed.
3. A budget constraint represents all the combinations of goods and services that
a consumer may purchase given current prices within his or her given income. If
there are only two commodities x and y with prices px and py and the income of
the consumer is M, then the budget equation or line is given by:
M = xpx+ypy
a. Decrease in the income of consumer.
when there is a decrease in income, the consumer's consumption possibility
decreases, and the budget line shifts inwards.

b. Increase in the price of one of the goods in consideration.


If price if x increases, the budget line will move inwards and if it decreases, the
line will move outward with the same vertical intercept in both cases (as price of y
hasn't changed). The opposite happens in case of change in price of y.

You might also like