Submitted to: Prof.Dipal Kothiya

Project on :

Sub: Micro Economics-1Division: A

Membership introduction

01 71

PATEL VIKAS.J

02 04

BISWAJIT JENA

03 47

PATEL HARSH.S

04 48

PATEL ILESH.V

05 81

RAVAL VIDHAN.P

NameRoll no.Sr. no. Signature

IntroductionAs the price of any commodity goes down, people start

purchasing more quantity of it and as the price goes up, they purchase lesser of it. But the problem is how much of change in price leads to how much change in quantity demanded ? If this problem is solved the seller would know how much of a quantity to be placed in the market with the respective change in price.

The concept of elasticity of demand solves this problem. It helps to measure the change in quantity demanded due to a given change in price. The concept is of great utility for producers, sellers, government, etc.

What is demand ?

It is defined as proportionate change in quantity demanded to proportionate change in price .Price elasticity of demand measures the responsiveness of demand of a commodity to a change in its price .

Factors Affecting Elasticity Of Demand Nature of commodity

Availability of close substitute Number of uses Proportion of total expenditure spent on the product Level of income Income of consumer Habit Time period Consumer expectations about future prices and income Population

Availability of Close Substitutes

Good having number of close substitutes will have an elastic demand.

Good with no close substitute will have an inelastic demand.

Nature of commodity

Necessities - Less elastic

Comforts - Elastic

Luxuries - More elastic

Number of uses More the number of uses a commodity can be put

to More elastic is the demand and vice versa.

Proportion Of Total Expenditure Spent On aCommodity Larger the proportion of total expenditure spent on a goods

higher will be the elasticity and vice versa.

Level Of Income

Higher the level of income, lower the elasticity of demand and vice versa.

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Some products which are not essential for some individuals are essential for others. If individuals are habituated of some commodities the demand for such commodities will be usually inelastic, because they will use them even when their prices go up. A smoker generally does not smoke less when the price of cigarette goes up. If you are habituated to a particular goods, elasticity will be less and vice versa.

Habits

Time Period Longer the time period, higher the elasticity and vice-versa. In the

long period, the customer has sufficient time to wait for fall in price and therefore demand changes when the price of the commodity changes. In the short-time period there is no time to wait for price change. He has to purchase what ever price is available and therefore demand is less elastic.

If a consumer believes that the price of the goods will be higher in the future, he/she is more likely to purchase the goods now. If the consumer expects that his/her income will be higher in the future, the consumer may buy the goods now.

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Consumer expectations about future prices and income:

Population : If the population grows this means that elasticity of demand will also increase.

Conclusion

From all the analysis above, the aggregate increase in quantity demanded for an inferior goods during a price fall is less than that of the normal goods due to the negative income effect of the inferior goods (an increase in relative income or real purchase power leads to a decrease in consumption). As for elasticity of demand, since income effect diminishes the aggregate increase in quantity demanded for an inferior goods during a price fall, an inferior goods is less elastic in demand than a normal goods. However, this paper did not discuss how other factors may also affect elasticity of demand such as availability of substitutes, time period to be considered, etc. Generally speaking, knowing whether a goods is inferior or normal can help predict the possible changes to consumer behavior, when there is a change in price, hence, minimizing the risk associated with any pricing strategies. For the same token, we can as well categories goods after experiencing the results in demand with a price change.