Econometrics And Econometricians December 01, 2021

Revenue curves under Different markets

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Broadly markets are of three types as follows: 1. Perfectly competitive market 2.Monopoly market 3.Monopolistic competitive market 1.Revenue curve under perfectly competitive market or Perfect competition: Under perfect competition, a firm is a price taker. It cannot influence /change the market price. AR and MR curve 2. Revenue Curve Under Monopoly: A monopolist is a price maker. He is the single seller of the product in the market. Under monopoly, however, if a firm desires to sell more , he has to reduce price of the product. Thus, there is  negative relationship  between price of the product na ddemand for the product in a monopoly market. Accordingly, a Firm’s AR curve (or the demand curve or the priice line) slopes downaward.  3. Revenue Curve Under Monopolistic Competition: In a Monopolistic Competitive market, producers sell “differentiated product” which means products whose close substitutes are easily available in the market. Under Monopolistic Compet...
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Price Elasticity of Demand Concept

 Price Elasticity of Demand: The concept

We learnt that during movement along the demand, decrease in own price of the commodity causes extension of demand and increase in own price of commodity causes contraction of demand. However, we did not discuss the magnitude of change or the extent or degree of change in quantity demanded due to change in the own price of the commodity.  We only discussed the direction of change.

Definition: Price Elasticity of demand is a measurement of the degree of change in demand in response to a change in own price of commodity. 

Measurement of Price Elasticity of demand: Percentage Change Method

According to Percentage Change method, elasticity of demand (say of commodity X) is measured as the ratio between percentage change in quantity demanded of commodity -X and percentage change in price of commodity-X.

Thus, for a given commodity (say-X), the Price Elasticity of Demand is given by:

Ed : (-) Price Elasticity of Demand = Percentage Change in Quantity Demanded ÷ Percentage Change in Price


Note: In the context of Elasticity of demand, (─) sign just indicates the inverse relationship between price and quantity. It has no mathematical significance. If the (─) is already given in the question (for eg: Ed = ─2), do not prefix (-) while estimating the elasticity of demand.

·         Demand for a commodity is often categorized as elastic when Ed > 1

·         Demand for a commodity is often categorized as inelastic when Ed < 1

·         Demand for a commodity is often categorized as Unitary elastic when Ed = 1

Distinct Situations of Elasticity of Demand

Situation 1: Perfectly Elastic

When the demand curve is a Horizontal Straight Line, Price Elasticity of demand is  Ed= ∞

Situation 2: Perfectly Inelastic 

When the demand curve is a Vertical Straight Line, Price Elasticity of demand is  Ed:= 0

Situation 3: Unitary

When the demand curve is a Regular Hyperbola, Price Elasticity of demand is  Ed:= 1

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