Elasticity can be defined as percentage change in demand for

Elasticity can be defined as percentage change in demand for a 1% change in decision attribute. For linear aggregate demand, what is the mathematical representation/formula for this statement? You must define the parameters you choose to use for this answer.

Solution

Price elasticity of demand is ameasure of the sensitivity of the quantity variable .Q to change in the price variable,P. Elasticity answer the question of how much the quantity will change in percentage terms for 1% change in the price and is thus importante in determining how revenue will change. The elasticity of demand indicates how sensitive the demand for a good is to a price change,if the PDE is between Zero and 1 ,demand is said to be inelastic ,if PED equals 1,the demand is unitary elastic,and if the price elasticity of demand is greater then 1 ,the demand is elastic.A low co-efficient implies that change in price have little influence on demand ,A high elasticity indicates that consumer will respond to a price rise by buying a lot less of the good and that consumers will respond to a price cut by buying a lot more.

Linear aggegate Demand- the demand curve is often graphed as a straight line of the form Q=a-bP , where a\'and b\'are parameters . the constant a\' embodies the effects of all factors other then price that affect demand.If income were to change .for example the effect of the change would be represented by a change in the value of a\' and b\'reflected graphically as a shift ofbthe demand curve .The constant b\' is the slope of the demand curve and shows how the price of the good affects the quantity demanded. The graph of the demand curve uses the inverse demand function in which price is expressed as a function of quantity .The standared form the demand equation can be converted to the inverse equation by solving for P or P= a/b - Q/b .More plainly in the intercept where quantity demanded is zero .b\' is the slope of demand curve Q is quantity and P is Price.