Price Elasticity in Economy - Assignment Example

Download file to see previous pages Simply the answer is no. he has to consume the amount required. He can’t avoid the consumption of it as it is highly required. Hence even a high change in price would leave the demand for medicines unaltered. There is no responsive change in demand to a change in price. A vertical straight line represents the demand curve.
In the above figure, horizontal and vertical axes measure quantity and price respectively. D is the demand curve. When the price is OP* the demand is OQ*. When the price is higher i.e. OP**, the demand sticks to OQ*. Hence price change has no impact on the demand for medicine.
If the commodity is a luxurious one there is the possibility of the postponement of demand. Without luxury, life can easily be spent. So a ceteris paribus rise in price causes a sharp decline in the demand for the good. Hence the demand for luxury goods is highly elastic. We consider the case of moisturizers. If price raises that would lead to a sharp decline in demand for it, as it is easily dispensable. The demand curve for such good can be represented graphically
In the above figure, horizontal and vertical axes measure quantity and price respectively and D is the demand curve. When the price is OP* then demand is OQ*. Now there is a rise in price from OP* to OP** and the demand declines from OQ* to OQ**. Here we find that a small price change causes a larger decline in demand. (Price rise=P**P* and demand fall=Q**Q*). Hence the demand for a luxury good is highly elastic.
Whenever the state uses a price ceiling some more operations should be adopted by the state. Always the price ceiling lies below the market price. In the market, the price determined by demand and supply enables the producers to maximize profit so a price restriction below the level of the equilibrium market price leads towards a fall in the profit level, which induces the producers to cut down the supply in the market. This can be shown diagrammatically. ...Download file to see next pagesRead More