Question

Carefully explain (using diagrams) why is the point of intersection between supply and demand for a...

  1. Carefully explain (using diagrams) why is the point of intersection between supply and demand for a product point of equilibrium price and quantity and no other point. What happens if price is above or below the point of equilibrium and how is the equilibrium price and quantity restored?
  2. What is price elasticity of demand? What determines whether a product’s demand is elastic, inelastic, unitary elastic, perfectly elastic and perfectly inelastic? What is mid-point formula to determine the elasticity of demand and why is it important to use it instead of the general formula for elasticity? Carefully explain.

Homework Answers

Answer #1

I can give answer of part b

Price elasticity of demand- it refers to responsiveness of percentage change in demand due to responsiveness of percentage change in price

Elasticity depends on how much change in demand takes due to percentage change in price.

Perfectly elastic demand- it represents little percentage change in price bring infinite change in demand.

Perfectly inelastic demand- it represents percentage change in price brings no change in demand.

Unit elastic - it represents same percentage change in demand due to percentage change in price.

Relatively elastic- in this percentage change in demand is more than percentage change in price.

Relatively inelastic - it represents percentage change in demand is less than percentage change in price.

Mid point elasticity formula

= Q2-Q1 ÷Q1+Q2 /2 ×100 × P1+P2/2 ÷ P2-P1×100

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