Economics Articles Library

Articles related with Micro Economics, Macro economics Accountancy and Business studies useful for XI, XII, CS foundation, CA(CPT), BBA ,, and for other readers.


Sunday, 6 January 2019

January 06, 2019

Shift in demand or change in demand

Shift in Demand or Change in Demand

Are you confused that what this term exactly means? After reading this article your doubt will be clear.

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Change in demand or shift in demand.

Firstly, I want to repeat the term again “Change in demand”. Now I want to write an another term “ change in quantity demanded”. What is the difference between these two terms?. Yes, you got it, When quantity demanded is used then it means demand is moving upward or downward on demand curve because own price of commodity is changing and other factors are remaining constant. Upward movement means contraction in demand when own price of commodity increases. Downward movement means contraction when own price of commodity decreases.

Change in demand means demand is changing due to change in other factors, own price remaining constant. It means increase in demand ( rightward or forward shift in demand curve ) or decrease in demand ( backward or leftward shift in demand curve ).

Finally, Increase in demand (due to other factors only ) means forward shift in demand whereas increase in quantity demanded ( due to price ) means downward movement on demand curve.

Decrease in demand means backward shift of demand curve and decrease in quantity demanded means upward movement on demand curve.

Saturday, 17 November 2018

November 17, 2018

Nature of economics

True Nature of Economics

It is said that economics is not only a science but also an art. It is a science in its methodology and art because it is applied in different situations and result is not guaranteed same in every situation. We can say that economics has two aspects; theoretical and practical.
But however it is necessary to understand true nature of economics. Although economics is considered as a science yet it cannot predict future course of events as natural science like physics and chemistry because economics is depend on human behavior and it is very difficult to hope exact behavior by human.

As a science economics is classified in positive science and normative science. To know in detail read our post positive and normative economics


economics is a science as well as an art

Economists are handicapped in a number of ways:

Economic realities are complex and not east to grasp.  There are crores of buyers and sellers and thousands of commodities.

Facts of economics are not always with them. They cannot observe them.

Experiments are not possible in economics like other sciences.

We cannot understand completely people’s actions. We cannot find their future intentions. There may be sudden changes in tastes and fashion that ruin the calculations of economics.

Hence, in view of this noting is certain in economics. Economists cannot agree on a certain point. Everything depends and anything is possible in economics because behavior of economic variables is not certain.

But there are things on those economists agree. For instance, there is substantial agreement on the policy which shall be pursued during recession and there are certain policies for underdeveloped economies. In these situations same policies are to be pursued.
Finally it is well said that economics is a science though it has its own limitations.

Saturday, 10 November 2018

November 10, 2018

Elasticity of Demand

This article about elasticity of demand includes following contents.

  • Elasticity of Demand
  • Price elasticity of demand
  • Measurement of Elasticity by percentage method
  • Types of price elasticity of demand
  • Flatter and steeper demand curve
  • Elasticity in absolute terms   
 Scroll down the page to read specific content.

Elasticity of Demand

The law of Demand does not indicate degree of change in demand due to change in price of a commodity. It only shows the direction i.e. demand decreases with increase in price and vice-versa but it is very important to know about degree of change for analyzing. Hence the concept of elasticity of demand is formulated in economics.
Due to changes in factors of demand other than own price of the commodity, degree of responsiveness of demand is known as elasticity of demand.
Let me clear you with an example. If price of related good changes by 2%, demand of the commodity changes by 3%, it means demand is changed 1.5 times. Such measurement is known as elasticity of demand.

If you want a presentation of elasticity of demand, click here to download.

how to measure elsaticity of demand. method of measurement of elasticity of demand


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Price Elasticity of Demand

Here, we measure the degree of responsiveness of quantity demand of a commodity due to change in own price of the commodity. Such measurement is known as price elasticity of demand.
It shows the magnitude of change in quantity demanded as a result of change in price.

Measurement of Price Elasticity of Demand

We are measuring price elasticity of demand by percentage method or proportionate method.

Percentage change in quantity demanded = (Q1 –Q/P1 – P) *100
Q1 = Latter quantity (after change)
Q   = Initial Quantity
P1 = Latter Price
P    = Initial price

 Note- Minus (-) sign before the values is ignored in economics.

#Types/Degrees of Price Elasticity of Demand

Unitary Elastic Demand (Ed =1)

If percentage change in the quantity demanded is equal to percentage change in price, it is known as unitary elastic demand.

demand change is equal to change in price is called unitary elastic demand

More than unitary elastic (Elastic) Ed>1

If percentage change in the quantity demanded is greater than percentage change in price, it is known as elastic demand.

demand change more than change in price is called elastic demand

Less than unitary elastic demand (Inelastic) Ed<1

If percentage change in the quantity demanded is less than percentage change in price, it is known as inelastic demand.

demand change less than change in price is called inelastic demand

Perfectly Elastic Demand (Ed=∞)

In this case price remains constant but quantity demand changes. Demand curve is horizontal straight line parallel to X axis. Quantity Demand may increase or decrease with no limits.

demand changes to unlimited extent on constant price is called perfectly elastic demand

Perfectly Inelastic Demand ( Ed=0)

In this case even price changes but quantity demanded does not change. We get vertical demand curve parallel to Y axis in this type of elasticity.

Demand does not change with change in price is called perfectly inelastic demand

#Factors affecting Price Elasticity of Demand

Nature of Commodity

Elasticity of demand of a commodity depends upon its nature. If commodity is necessity for life, it is inelastic because human ignores price changes in case of necessities. Whatever the prices, he has to purchase these commodities.

In case of Luxury goods, demand is elastic. When price of luxury goods fall, people buy more and when price rises, people buy less substantially.

Availability of Substitute Goods

If substitute good is available, people shift quickly and change their demand easily. Hence it can be said that demand of such type of goods is elastic. If substitute goods are not available then people have to buy same good whatever the prices, hence demand in this case is inelastic.

Income Level

The goods have inelastic demand that are purchased by higher income person because such person ignores the price change and continues purchasing. Low income group has more elastic demand.


The demand for goods that are consumed habitually is inelastic because even price change, consumer continues to purchase and consume that commodity. Examples, Alcohol, Tobacco etc.

Level of own price of good

Higher own price of a good like car, gold etc have elastic demand because their demand is very sensitive to change in price and vice-versa.

Measurement of Price Elasticity by Total Expenditure Method

We measure elasticity of demand on basis of change in total expenditure in response to a change in price. This method was given by Professor Alfred Marshall.
Total expenditure  = Quantity demanded * Price
Following points should be noted to measure elasticity of demand by expenditure method.

                              When Price Increases
1.       If expenditure remains same
Ed = 1
Unitary Elastic demand
2.      If Expenditure falls
Ed >1
More than unitary elastic
3.      If Expenditure increases
Less than unitary

                                When price falls
1.       If expenditure remains same
Ed = 1
Unitary Elastic demand
2.      If Expenditure falls
Ed <1
More than unitary elastic
3.      If Expenditure increases
Less than unitary

elasticity of demand by expenditure method

Never measure elasticity in absolute terms

Never measure elasticity of demand is terms of an absolute change in quantity in response to a given change in price of the commodity.
Now the question arises that what is absolute change in quantity. Let us understand with an example.

Never ,measure elasticity in absolute terms

Thus in the above figure one may conclude that Ed>1 because PP1 (Change in price) > MM1 (change in quantity) but this conclusion is wrong. You should measure elasticity in terms of percentage at point S.
Let us take an illustration.

Assumed values : Q =10, Q1=15,   Change in   Q = 5; P=5, P1= 40,    Change in P= -10

Ed =(-) change in Q * P/ change in P*Q
= (-) 5*50/-10*10
=  2.5

Hence Ed = 2.5 even when PP1 is greater than MM1

Flatter and Steeper Curve of Demand

Do you know that what is meant by flatter and steeper curve of demand in terms of elasticity?  It is very simple. Flatter curve is more elastic than steeper curve. Steeper curve is less elastic than flatter curve.  In other words, when a demand curve is flatter, change in quantity demand is greater than steeper curve.  You can understand well with help of following diagram:

Flatter curve is more elastic than steeper curve

In the above diagram:
  •   D1 and D2 are two demand curves starting from the point R
  •    D2 is flatter and D1 is steeper.
  • ·Now, when price reduces to OR1 from OR then quantity demand for D1   increases from zero to OM1 
  •    D2 curve shows rise in quantity demanded from zero to OM1
Hence OM1 is greater than OM. We can say that flatter curve is more elastic than steeper curve.

Cross Price Elasticity

The degree of change in demand of a commodity due to change in price of related goods is known as cross price elasticity.

Example :  If demand of tea changes by 2% due to change in price of its substitute good coffee by 1% then this type of measurement of elasticity is known as cross price elasticity of demand.

Ed       =          % change in quantity of good A/ % change in price of good B

Substitution Elasticity  
The substitution elasticity indicates that to what extent one commodity can be substituted for another without making any change in total satisfaction. It is the measure of ease or difficulty with which one commodity is substituted with other.

There are two situations:

*      Substitution elasticity may be infinite. It is happened when goods are perfect substitutes.

*     Substitution elasticity may be zero. It happens when goods are not perfect substitutes. There can be no substitution. Goods must be used in fixed quantity or proportion.