Microeconomics

Concept: Elasticity of demand refers to the degree of responsiveness of quantity demanded of a commodity due to a change in one of its determinants, especially price. In simple terms:
It shows how much demand changes when price changes.
Definition: Price elasticity of demand is defined as: Measurement by Percentage Method: The percentage (or proportionate) method was developed by Alfred Marshall. It measures elasticity using proportionate changes instead of absolute changes. Formula: Expanding the formula: Steps to Measure:

• Find change in quantity demanded ( ).
• Find change in price ( ).
• Calculate percentage change in both.
• Take the ratio using the formula above.

Interpretation of Values:

• : Elastic demand
• : Unitary elastic demand
• : Inelastic demand
• : Perfectly inelastic
• : Perfectly elastic

Conclusion:
Thus, elasticity of demand measures responsiveness of demand to price changes, and the percentage method calculates it as the ratio of percentage change in quantity demanded to percentage change in price.

Concept: Under perfect competition, no individual buyer or seller can influence the market price. The equilibrium in the market is determined by the interaction of:

• Market demand (from consumers)
• Market supply (from producers)

Equilibrium Meaning: Market equilibrium refers to a situation where: At this point:

• There is no shortage.
• There is no surplus.
• Price remains stable.

Determination of Equilibrium Price:

• The equilibrium price is determined at the point where the demand curve intersects the supply curve.
• At this price, buyers are willing to buy exactly the quantity that sellers are willing to sell.

Determination of Equilibrium Quantity:

• The quantity corresponding to the equilibrium price is called equilibrium quantity.
• It is the level of output where market clears completely.

Adjustment Mechanism: 1. Excess Demand (Shortage):

• When price is below equilibrium:
• Competition among buyers pushes price upward.

2. Excess Supply (Surplus):

• When price is above equilibrium:
• Sellers reduce price to clear unsold stock.

Graphical Representation:

• Demand curve slopes downward.
• Supply curve slopes upward.
• Their intersection gives equilibrium price and quantity.

Conclusion: Thus, under perfect competition, equilibrium price and quantity are determined by the interaction of market demand and supply, where quantity demanded equals quantity supplied, ensuring market stability.