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Economics Supply And Demand Essay

3031 words - 13 pages

Elastic and inelastic demand

Elastic and inelastic demand
Task A
1. Elasticity of Demand measures sensitivity of the demand for a good to a price change. If the price of a good matters little, a change in the price of that good will have a small impact on one’s willingness to sell or buy and this would indicate an inelastic situation. However, if a small change in prices causes substantial changes in one’s willingness to buy or sell, the good is said to be elastic. McConnell, Brue, and Flynn (2012) note that when demand is elastic a decrease in price will increase total revenue because even though the price is less the additional goods sold make up the difference. Conversely, if ...view middle of the document...

A normal good is classified as one where an increase in income causes an increase in demand. As income increases, demand for goods and services increases. One example would be luxury watches; as the income level increases, consumers are likely to buy these over a timex. An inferior good by comparison is one where an increase in income causes a decrease in demand. An example of this behavior is, as lower income consumer’s’ income increases they will purchase fewer low quality goods. Typically, as income increases quantity of a normal good increases, and as income decreases quantity of a normal good decreases. An inferior good provides that when income raises quantity decreases and when income decreases quantity increases.
Task B
1. Coefficient of elasticity of demand. This is the response between the two variables of price and quantity of demand. This coefficient is calculated by dividing the percentage change in one variable by the percentage change in another. Percent change of quantity divided by percent change of price. %ΔQ %ΔP If the coefficient of this equation is greater than 1, the result is elastic. If the coefficient is less than 1, the result is inelastic and finally if the coefficient is equal to one the result is unit elastic.
2. Coefficient of Cross-price elasticity. Cross-price elasticity of demand is calculated by dividing the change in percent of one quantity by the change in percent of another quantity’s price. %ΔQa %ΔPb When the price of product (b) increases by 20% and the quantity of product (a) increases by 20% the products are said to be substitutes and elastic. The larger the number above 0 the closer the products are very close substitutes. If the cross-price elasticity is negative, the products are complements. If the calculated amount is 0, the products are neither substitutes nor complements.
3. Income elasticity coefficient. A normal good is defined by the coefficient being positive. The percent change in quantity divided by the change in income determines the elasticity and whether the good or product is normal. As the price of a product increases and the quantity increases the product is considered normal while a negative result provides for an inferior product. %ΔQ %Δ Income .
Task C
1. Elasticity of demand measures the percentage change in quantity divided by percentage change in price. Inelastic demand occurs when the quantity demanded is insensitive to a change in the price while an elastic demand is very sensitive to a change in price. As such, elasticity of demand captures the demand side of the market. Cross-price elasticity rather measures the substitutability and complementary value as a result of dividing one product’s percent change in quantity by a different product’s percent change in price. Elasticity of demand and Cross-price elasticity deal with quantity and price differently with the former considering the changes affecting one product while Cross-price...

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