Demand, Supply and Elasticity

Demand is basically the requirement or the need of the customers who have the buying power to purchase certain goods. Whereas, supply is related to the manufacturer or producer of those goods / services in order to fulfil customers demand.

Elasticity demand of a particular type of commodity tells the response of a customer with respect to change in price of that commodity.

Suppose we have the following data and we need to calculate :

Therefore,

When prices of an inelastic commodities are changed, then there is less effect or change in its quantity demand. This means they are necessary commodities. On the other hand if prices of an elastic commodity changes, then there is a drastic change in its quantity demand. This means such types of commodities are luxury items.

Suppose below scenario:

The above table shows different combination of price with respect to quantity with its price elasticity. The supplier should not increase the price after point “C” because the Price Elasticity demand after point “C” is changing from inelastic to elastic. This means that till Point “C”, supplier is going to maximize his revenue, but after that there is going to be a drastic decrease in quantity as at point D and onwards, the combination has changed to elastic, which means revenue is now going to be decrease.

Question:

Calculate for the following data:

Solution:

PE (d) = 0.5

Since this means that the given demand is inelastic, which means that at this point the producer can increase the price because major increase in price will result in minor decrease in quantity demand and therefore more revenue will be generated.