A price ceiling sets the maximum legal price a seller may

charge for a product or service. A price at or below the

ceiling is legal: A price above it is not.
• A price Ceiling results in a persistent shortage. A
price ceiling is a maximum legal price such as Pc that
is below the equilibrium price. It results in a
persistent product shortage, here shown by the
distance between Qd and Qs.
A price floor is a minimum price fixed by the
government. A price at or above the price floor is legal: a
price is below it is not.
• A price floor results in a persistent surplus. A price floor is
a minimum legal price such as Pf which results in a
persistent product surplus, here shown by the horizontal
distance between Qs and Qd.

Elastic Demand:
• Demand is elastic if a specific percentage change in price
results in a larger percentage change in quantity
demanded. Then Ed will be greater than 1. Example:
Suppose that a 2 percent decline in the price of cut flowers
results in a 4 percent increase in quantity demanded.
Then demand for cut flowers is elastic and Ed=.04/.02=2
Inelastic Demand:
• If a specific percentage change in price produces a smaller
percentage change in quantity demanded, demand is
inelastic. Then Ed will be less than 1. Example: Suppose
that a 2 percent decline in the price of coffee leads to only
a 1 percent increase in quantity demanded. Then demand
is inelastic and Ed=.01/.02= 0.5
Unit Elasticity:
The case separating elastic and inelastic demands occurs where
a percentage change in price and the resulting percentage
change in quantity demanded are the same. Example: Suppose
that a 2 percent drop in the price of chocolate causes a 2
percent increase in quantity demanded. This special case is
termed unit elasticity because Ed is exactly 1 or unity. In this
example, Ed=.02/.02= 1.
Extreme Cases:
• When we say demand is “inelastic” we do not mean that
consumers are completely unresponsive to a price change.
In that extreme situation, where a price results in no
change whatsoever in the quantity demanded, economists
say that demand is perfectly inelastic. The price elasticity
coefficient is zero because there is no response to a change
in price. Approximate examples include an acute diabetics
demand for Insulin . A line parallel to vertical axis , such as
D1 shows perfectly inelastic demand graphically.
Conversely when we say, demand is “elastic” we do not mean
that consumers are completely responsive to a price change .
In that extreme situation, where a small price reduction
causes buyers to increase their purchases from zero to all
they can obtain, the elasticity coefficient is infinite(=∞) and
economists say demand is perfectly elastic . A line parallel to
the horizontal axis , such as D2 in the figure beside, shows
perfectly elastic demand.
Short Q.

.
2. Determinants of price elasticity :
1. Substitutability
2. Proportion of Income
3. Luxuries versus Necessities: In general, the more that a good is considered to
be a “luxury” rather than a “necessity” the greater is the price elasticity of
demand.
4. Time Generally, product demand is more elastic the longer the time period
under consideration. Consumers often need time to adjust to changes in price.
3. Economists assume that price is the most important influence on the
amount of any product purchased but we know that other factors can and do
affect purchases. These factors are called determinants of demand. These are
assumed to be constant when a demand curve like D1 is drawn. When any of
these determinants changes the demand curve will shift to the right or left
The basic determinants of Market demand are:
• Consumer’s tastes (preferences)
• The number of consumers in the market
• Consumer’s incomes
• The prices of related goods
• Consumer expectations about future prices and incomes
4. Income Effect law of demand
The income effect indicates that a lower price increases the purchasing
power of a buyer’s money income, enabling the buyer to purchase more of
the product than she or he could buy before.
A higher price has the opposite effect. The substitution effect suggest that
at a lower price buyers have the incentive to substitute what is now a less
expensive product for similar products that are now relatively more
expensive.
For example, A decline in the price of chicken will increase the purchasing
power of consumer incomes, enabling people to buy more chicken(the
income effect). At a lower price , chicken is relatively more attractive and
consumers tend to substitute it for pork, lamb, beef, and fish (substitution
effect). The income effect and substitution effects combine to make
consumers able and willing to buy more of a product at a low price than at a
high price.
 5. why between price and quantity have an inverse relationship?

Law of Demand:

This law states that, all else being equal, there is an inverse relationship
between the price of a good or service and the quantity demanded by
consumers. In other words, as the price of a good rises, the quantity
demanded decreases, and as the price falls, the quantity demanded increases.
The reason for this relationship is rooted in human behavior and preferences

Law of Supply:
This law states that, all else being equal, there is a direct relationship between
the price of a good or service and the quantity supplied by producers. In other
words, as the price of a good rises, the quantity supplied increases, and as the
price falls, the quantity supplied decreases.
The reason for this relationship is rooted in the profit motive of producers.

Determinant Examples

Changes in A decrease in the price of microchips increase the

resource supply of computers ; an increase in the price of crude
prices oil reduces the supply of gasoline.
Changes in The development of more effective wireless
technology technology increases the supply of cell phones.

Changes in An increase in the excise tax on cigarettes reduces the

taxes & supply of cigarettes; a decline in subsidies to state
subsidies universities reduces the supply of higher education.
Changes in An increase in the price of cucumbers decreases the
prices of supply of watermelons.
other goods
Changes in An expectations of a substantial rise in future log
expectations prices decreases the supply of logs today.

Changes in An increase in the number of tatoo parlors increases

number of the supply of tatoos; the formation of women’s
suppliers professional basketball leagues increases the supply of
women’s professional basketball games.
6.