Partial and general equilibrium, law of demand and demand analysis
Figure 1 Vertical supply curve (Perfectly Inelastic Supply)
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- Interpretation of elasticity
Figure 1 Vertical supply curve (Perfectly Inelastic Supply)When demand D1 is in effect, the price will be P1. When D2 is occurring, the price will be P2. The quantity is always Q, any shifts in demand will only affect price. It is sometimes the case that a supply curve is vertical: that is the quantity supplied is fixed, no matter what the market price. For example, the surface area or land of the world is fixed. No matter how much someone would be willing to pay for an additional piece, the extra cannot be created. Also, even if no one wanted all the land, it still would exist. Land therefore has a vertical supply curve, giving it zero elasticity (i.e., no matter how large the change in price, the quantity supplied will not change). Supply-side economics argues that the aggregate supply function – the total supply function of the entire economy of a country – is relatively vertical. Thus, supply-siders argue against government stimulation of demand, which would only lead to inflation with a vertical supply curve. 1.4 Price Elasticity of Demand Price elasticity of demand (PED) is defined as the measure of responsiveness in the quantity demanded for a commodity as a result of change in price of the same commodity. It is a measure of how consumers react to a change in price. In other words, it is percentage change in quantity demanded by the percentage change in price of the same commodity. In economics and business studies, the price elasticity of demand is a measure of the sensitivity of quantity demanded to changes in price. It is measured as elasticity, that is it measures the relationship as the ratio of percentage changes between quantity demanded of a good and changes in its price. In simpler words, demand for a product can be said to be very inelastic if consumers will pay almost any price for the product, and very elastic if consumers will only pay a certain price, or a narrow range of prices, for the product. Inelastic demand means a producer can raise prices without much hurting demand for its product, and elastic demand means that consumers are sensitive to the price at which a product is sold and will not buy it if the price rises by what they consider too much. Drinking water is a good example of a good that has inelastic characteristics in that people will pay anything for it (high or low prices with relatively equivalent quantity demanded), so it is not elastic. On the other hand, demand for sugar is very elastic because as the price of sugar increases, there are many substitutions which consumers may switch to. Interpretation of elasticityA price fall usually results in an increase in the quantity demanded by consumers (see Giffen good for an exception). The demand for a good is relatively inelastic when the change in quantity demanded is less than change in price. Goods and services for which no substitutes exist are generally inelastic. Demand for an antibiotic, for example, becomes highly inelastic when it alone can kill an infection resistant to all other antibiotics. Rather than die of an infection, patients will generally be willing to pay whatever is necessary to acquire enough of the antibiotic to kill the infection. 
Figure 2 Perfectly inelastic demand 
Figure 3 Perfectly elastic demands
Various research methods are used to calculate price elasticity: Test markets Analysis of historical sales data Conjoint analysis Directory: sim sim -> Simon Mckeown Artist C. V. DaDaFest International Artist of the Year 2010 sim -> Viii seb extended Abstracts Sample File: Note Initial Caps sim -> Simscript III release 0 May 23th, 2016 sim -> Concepts and terminology in the Simula Programming Language sim -> Stormwind navigation simulator, which won the Open Data Innovation Contest Apps4Finland in 2013 sim -> Multiscale Simulation Representative publications sim -> United Nations Development Programme Country: Solomon Islands Project Document sim -> Antecedent, antebellum, ante meridian sim -> A simulated Hallucination Mechanism Compared to Hallucination Brain Response Studies Download 0.63 Mb. Share with your friends:
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