Overal demand for goods

Overal demand for goods

1. PRICE ELASTICITY OF DEMAND

   • Ratio b/w the % change of demand % change in price
     • ϵ = − %x/%p = − (dx/x)/ (dp/p) = − (dx/dp) .(p/x)
   • DIFFERENT DEMAND FUNCTION AND PRICE ELASTICITY
     • Isoelastic demand: ϵ = constant
       • Demand function: p = ax^(−1/b)
         • Greater b, more price elastic the demand function, stronger reaction of demand to price changes
     • Perfect elastic demand: ϵ → ∞
       • Each marginal change to p, lead to infinite large change in demand
     • Perfect inelastic demand: ϵ=0
       • Price change have no effect on demand
     • Linear demand function: x=A-bp
       • Elasticity formula: ϵ = − (dx/dp)* (p/x)

2. INCOME ELASTICITY

   • e = (dx/dE)*(E/x)
   • e=1 --> homothetic pref
   • e>1 --> luxury good
   • e<1-->neccessary good
   • e<0 --> inferior good