Economics is extremely useful as a form of

employment for economists.

John Kenneth Galbraith

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 Topics Page
What is Economics?................................................................................................................................. 3
What is Demand?.................................................................................................................................... 3
What is Supply?....................................................................................................................................... 3
What is Law of Demand?......................................................................................................................... 3
What is Law of Supply?............................................................................................................................ 3
The Elasticity of Demand......................................................................................................................... 4
Degrees of Price Elasticity of Demand
 Elastic Demand........................................................................................................................... 4
 Inelastic Demand........................................................................................................................ 5
 Unitary Elastic Demand.............................................................................................................. 5
 Perfectly Elastic Demand............................................................................................................ 6
 Perfectly Inelastic Demand......................................................................................................... 6
The Elasticity of Supply............................................................................................................................ 7
Degrees of Price Elasticity of Supply

 Elastic Supply............................................................................................................................. 7
 Inelastic Supply.......................................................................................................................... 8
 Unitary Elastic Supply................................................................................................................. 8
 Perfectly Elastic Supply............................................................................................................... 9
 Perfectly Inelastic Supply............................................................................................................ 9
Degrees of Price Elasticity of Demand (Examples)
 Elastic Demand (Example).......................................................................................................... 10
 Inelastic Demand (Example)....................................................................................................... 11
 Unitary Elastic Demand (Example).............................................................................................. 11-12
 Perfectly Inelastic Demand (Example)......................................................................................... 12
 Perfectly Elastic Demand (Example)............................................................................................ 13
Degrees of Price Elasticity of Supply (Examples)
 Elastic Supply (Example)............................................................................................................. 14
 Inelastic Supply (Example).......................................................................................................... 15
 Unitary Elastic Supply (Example).................................................................................................15-16
 Perfectly Inelastic Supply (Example)...........................................................................................16-17

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What is Economics?
Economics
• A social science that studies and influences human behavior.
• Economics is the study of what constitutes rational human behavior in the
endeavor to fulfill needs and wants.

What is Demand?
Demand
 Quantity demanded is the amount of a good that buyers are willing and able
to purchase.

What is Supply?
Supply
 Quantity supplied is the amount of a good that sellers are willing and able to
sell.

What is Law of Demand?

Law of Demand
 The law of demand states that there is an inverse relationship between price
and quantity demanded.

What is Law of Supply?

Law of Supply
 The law of supply states that there is a direct (positive) relationship between
price and quantity supplied.

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The Elasticity of Demand
 Price elasticity of demand is a measure of how much the quantity demanded
of a good responds to a change in the price of that good.
 Price elasticity of demand is the percentage change in quantity demanded
given a percent change in the price.
Computing the Price Elasticity of Demand
 The price elasticity of demand is computed as the percentage change in the
quantity demanded divided by the percentage change in price.

P e rc e n ta g e c h a n g e in q u a n tity d e m a n d e d
P ric e e la s tic ity o f d e m a n d =
P e rc e n ta g e c h a n g e in p ric e
The Midpoint Method: A Better Way to Calculate Percentage Changes and Elasticities
 The midpoint formula is preferable when calculating the price elasticity of
demand because it gives the same answer regardless of the direction of the
change.

(Q 2  Q 1) / [(Q 2  Q 1) / 2 ]
P ric e e la s tic ity o f d e m a n d =
(P 2  P 1 ) / [(P 2  P 1 ) / 2 ]

Degrees of Price Elasticity of Demand

Elastic Demand (P.Ed > 1)
If the co-efficient of price elasticity of demand >1, then demand is said to be price
elastic i.e. highly responsive to a change in price.

$5
4 Demand

Price 50 100

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Inelastic Demand (P.Ed < 1)
If the co-efficient of price elasticity of demand <1, then demand is said to be price
inelastic i.e. unresponsive to a change in price.

$5
4

0 Demand
Qu
Unitary Elastic 90 100 Demand (P.Ed = 1)
If the co- Price efficient of price elasticity of
demand =1, then demand is said to be
Unitary Elastic Demand.

$5
4

Demand
80 100
Price

Perfectly Elastic 0 Demand (P.Ed = infinity Q

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If the co-efficient of price elasticity of demand = infinity, then demand is said to be
perfectly elastic Demand.

0 1. At any price above

$4, quantity
demanded is zero

$4 2.At exactly $4,

consumers will buy
Demand
any quantity.

Price
3.At a price below $4,
quantity demanded is
infinite.

Perfectly Inelastic Demand (P.Ed = 0)

If the co-efficient of price
elasticity of demand = 0, then
demand is said to be
Perfectly Inelastic Demand. Demand

$5
4
1.An
increase in
100
Price

2.Leaves the quantity demanded unchanged

0 Qu

THE ELASTICITY OF SUPPLY

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  Price elasticity of supply is a measure of how much the quantity supplied of a
good responds to a change in the price of that good.
 Price elasticity of supply is the percentage change in quantity supplied
resulting from a percent change in price.

Computing the Price Elasticity

0 of Supply
 The price elasticity of supply is computed as the percentage change in the
quantity supplied divided by the percentage change in price.
P e rc e n ta g e c h a n g e
in q u a n tity s u p p lie d
P ric e e la s tic ity o f s u p p ly =
P e rc e n ta g e c h a n g e in p ric e

Degrees of Price Elasticity of Supply

Elastic Supply (P.Es > 1)

If the co-efficient of price elasticity of Supply >1, then Supply is said to be price
elastic i.e. highly responsive to a change in price.

4
Supply

200 100
Price

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Inelastic Supply (P.Es < 1)
If the co-efficient of price elasticity of Supply <1, then Supply is said to be price
inelastic i.e. unresponsive to a change in price.

Qua
$5
4 0

Supply
Price
100 110

Unitary Elastic Supply (P.Es

= 1)
If the co-efficient of price elasticity of
supply =1, then supply is said to be Unitary Elastic Supply.

0 Quant
$5
4

Price Sup
p ly

100 125

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Perfectly Elastic Supply (P.Es = infinity)
If the co-efficient of price elasticity of supply = infinity, then supply is said to be
perfectly elastic Supply.

1.At any price

above $4, quantity
supplied is infinite.

$4 2.At exactly $4,

Supply
producers will supply

0 Quant
any quantity.

Price
3.At a price below $4,
quantity supplied is zero.

Perfectly Inelastic Supply (P.Es =

0)
If the co-efficient of price elasticity of
supply = 0, then supply is said to be Perfectly Inelastic Supply.

$5 Supply
1.An increase
in price...
4
0 Quantity

Price 2.Leaves the quantity supplied

unchanged

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 100 Quantity
Elastic Demand (P.E0d > 1)
Example
If the price of sugar rises from Rs.60 to Rs.75, then the amount I buy falls
from 10 to 5 kg per week. Calculate the price elasticity of demand?
Data:
Price 1 Rs.60
Price 2 Rs.75
Qty demanded 1 10 kg
Qty demanded 2 5 kg
75
Solution:
¿ 60 Demand
P.Ed = ¿ /2 ¿ [(P 2−P 1)/(P2+ P 1)/2]

P.Ed =
Price
5 10

[(5−10)/(5+10)/2]
[(75−60)/(75+60)/2]
¿
P.Ed = ¿ /2 ¿ [(15)/(135)/2]

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 0.1666666667
P.Ed =
0.0555555556
P.Ed = 2.99 (Elastic Demand)

Qu
0

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Inelastic Demand (P.Ed < 1)
Example
If the price of Dalda Ghee rises from Rs.180 to Rs.220, then the amount I
buy falls from 10 to 8 kg per week. Calculate the price elasticity of
demand?
Data:
Price 1 Rs.180
Price 2 Rs.220
Qty demanded 1 10 kg
220
Qty demanded 2 08 kg 18
Solution: 0 Demand
[(Q 2−Q 1)/(Q 2+ Q1)/2]
P.Ed = ¿/( P 2+ P 1)/2 ¿
¿

P.Ed =
Price 0810

[(8−10)/(8+ 10)/2]
¿
¿ /(220+180)/2 ¿
[(−2)/(18)/2]
P.Ed = [( 40)/(400)/2]
0.05
P.Ed = 0.0555555556

P.Ed = 0.89 (Inelastic Demand)

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 0 Q

Unitary Elastic Demand (P.Ed = 1)

Example
If the price of sweets rises from Rs.200 to Rs.400, then the amount I buy
falls from 6 to 3 kg per week. Calculate the price elasticity of demand?
Data:
Price 1 Rs.200
Price 2 Rs.400
Qty demanded 1 06 kg
40
Qty demanded 2 03 kg 0
200
Solution: Demand
[(Q 2−Q 1)/(Q 2+ Q1)/2]
P.Ed = [( P 2−P 1)/( P 2+ P 1)/2]

P.Ed =
Price
03 06
[( 3−6)/( 3+6)/2]
[( 400−200)/( 400+200)/2]
[(−3)/(9)/2]
P.Ed = [(200)/( 600)/2]
0 .1666666667
P.Ed = 0 .1666666667
P.Ed = 1 (Unit Elastic Demand)

Perfectly Inelastic Demand (P.Ed = 0)

Example
If the price of Ensure milk rises from Rs.930 to Rs.1030, then the amount I
buy will be the same as for Rs.930 which is 2 packets per month. Calculate
the price elasticity of demand?
Data:
Price 1 Rs.930
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emand

1030
02
 Price
Price 2 Rs.1030
Qty demanded 1 02 packs
Qty demanded 2 02 packs
930
Solution:
[(Q 2−Q 1)/(Q 2+ Q1)/2]
P.Ed = [( P 2−P 1)/( P 2+ P 1)/2]
[(2−2)/(2+2)/ 2]
P.Ed = [(1030−930)/(1030+ 930)/2]
[(0)/( 4)/2]
P.Ed = [(100)/(1960)/2]
0
P.Ed = 0.0255102041

P.Ed = 0 (Perfectly Inelastic Demand)

Perfectly Elastic Demand (P.Ed = infinity)
Graphically this is completely horizontally demand curve. That’s a situation when even a small
change in price causes an infinite change in quantity. In other words, It’s an example when the
price goes up even by one cent, people will saying; No thank you, I am not interested in this good. I
am going to get something else. And it must be case it is a good for which very close substitutes,
perfect substitutes available.
I sometimes think of two soda machines. What happens of one of these machines increases their
price to Rs.10000. These two machines are sitting like next to each other. One of them cost
Rs.5000, the other one cost Rs1000. No one going to buy the soda machine that ask for Rs.10000.
Everyone is going to go to the one that cost Rs.5000. So that’s an example where the demand for
the soda machines in this environment is perfectly elastic because there is no ability for 1 machine
to raise the price because no one is going to go to buy that machine but everyone is going to other
close substitutes machines.

0
Q
1. At any price above
Rs.5000, quantity
demanded is zero

2.At exactly Rs.5000,

consumers will buy
any quantity.

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Price Page 14
3.At a price below
Rs.10000, quantity
demanded is infinite.
 500
0

Elastic Supply (P.Es > 1)

Example
If the price of Deluxe Juice Extractor rises from Rs.3000 to Rs.3510, then
the quantity supplied increases from 50 extractors to 80 extractors per
month. Calculate the price elasticity of supply?
Data: 0 Qu
Price 1 Rs.3000
Price 2 Rs.3510
Qty supplied 1 50 Ext.
Qty supplied 2 80 Ext.
Solution: 3500
[(Q 2−Q 1)/(Q 2+ Q1)/2]
3000
P.Es = [( P 2−P 1)/(P 2+ P 1)/2]

Supply
P.Es =
Price
50 80

[(80−50)/(80+50)/2]
[(3510−3000)/(3510+3000)/2]

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 [(30)/(130)/2]
P.Es = [(510)/( 6510)/2]
0.1153846154 Quan
P.Es = 0.0391705069

P.Es = 2.94 (Elastic Supply)

Inelastic Supply (P.Es < 1)

Example
When the price of gasoline increases from Rs.62 to Rs.74, then the
quantity supplied increases from 400 litres to 420 litres per day. Calculate
the price elasticity of supply?
Data:
Price 1 Rs.62
Price 2 Rs.74
Qty supplied 1 400 litres
Qty supplied 2 420 litres
Solution:
0
P.Es =
[(Q 2−Q 1)/(Q 2+ Q1)/2] 74
[( P 2−P 1)/( P 2+ P 1)/2]
[( 420−400)/(420+ 400)/ 2]
P.Es = [(74−62)/(74+ 62)/2] 6
2 S up
ply
P.Es =
[(20)/( 820) /2] Price
[(12)/(136)/2] 42
0.012195122 400 0
P.Es = 0.0441176471

P.Es = 0.276 (Inelastic Supply)

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Unitary Elastic Supply (P.Es = 1)
Example
If the price of strawberry rises from Rs.150 to Rs.300, then the quantity
supplied increases from 500 to 1000 packets per week. Calculate the price
elasticity of supply?
Data:
Price 1 Rs.150
Price 2 Rs.300
Qty supplied 1 500 packs
0 Quant
Qty supplied 2 1000 packs
Solution:
[(Q 2−Q 1)/(Q 2+ Q1)/2]
P.Es = [( P 2−P 1)/(P 2+ P 1)/2]
[(1000−500)/(1000+500)/2]
P.Es = 30
[(300−150)/(300+150)/2]
0
[(500)/(1500)/2] 15
P.Es = [(150)/( 450)/2] 0
P.Es = Price
0.1666666667
0.1666666667
P.Es = 1 (Unit Elastic 500 1000
Supply)
Suppl

Perfectly Inelastic Supply (P.Es =

0)
Example
If the price of wheat rises from
Rs.2900 to Rs.3250, then
the quantity supplied will be the same as for earlier price which is
100 bags per week. Calculate the price elasticity of supply?
Data:
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Supply
Price 0 Quan
Price 1 Rs.2900
Price 2 Rs.3250
Qty supplied 1 100 bags 2900
Qty supplied 2 100 bags
Solution:
[(Q 2−Q 1)/(Q 2+ Q1)/2]
P.Es = [( P 2−P 1)/(P 2+ P 1)/2]
[(100−100)/(100+100)/2]
P.Es = [(3250−2900)/(3250+2900)/2]
[(0)/( 200)/2]
P.Es = [(350)/( 6150)/2]
0
P.Es = 0.0284552846
P.Es = 0 (Perfectly Inelastic Supply)

0 100 Quantit

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