Price/Income Elasticity of Demand

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• Price Elasicity and Income Elasticity of Demand Essay

  ...Q 1. Discuss the practical application of Price elasticity and Income elasticity of demand. Ans: There are many practical applications of price elasticity and Income elasticity of demand which are discussed as below. (A) Practical application of price elasticity of demand : 1. Production planning: It helps a producer to decide about the volume of production. When the demand is elastic, a producer has to produce different quantity of product and fixed quantity when the demand is inelastic. 2. It helps in fixing the prices of different goods: When the demand is elastic, the producer will change the price of the product according to change of demand and will approach the price decrease policy. Similarly when the price is in-elastic the producer will keep the price of the product fixed and will approach price-increase police. Similarly it helps a monopolist to practise price discrimination on the basis of elasticity of demand. 3. It helps in fixing the rewards for factor inputs: The producer determines the rewards for factor inputs of the product according to the elasticity nature of the...

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• Elasticity & Demand Essay

  ...MBA 502 – Elasticity & Demand Price: Clearly one of the most important decisions for the firm How will consumers react to a price change? Buy less as price increases, but how much less? How does a price change affect revenues? Consumer adjustment to a change in price: Law of demand – price and quantity are inversely related…what happens when price changes? Substitution effect: Buy more (less) of a good when price falls (rises) relative to price of other good Income effect: Can buy more (less) of all goods when price falls (rises) Increases real income Price Elasticity of Demand Indicates how responsive consumers are to variation in price When price increases, buy more…but how much more? Percent change in quantity divided by percent change in price Similar to miles per hour (100 mi in 2 hours…50 mph) # is how much more (less) you buy when price falls (rises) $1 NOT slope! Take absolute value because it is almost always negative Examples: % ∆ Q = -40%, % ∆ P = 25%....ε = 1.6 % ∆ Q = 5%, % ∆ P = 25%....ε = 0.2 Elasticity: Comparing the % ∆ Q to the % ∆ P…for a 1% price change, how much does quantity demanded...

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• Price Elasticity of Demand Essay

  ...elicited more emotion than the rising price of gasoline in the United States. Major storms in the southeastern states in 2005 and the ongoing strife in the Middle East have caused the price at the pump to rise to record levels at times and to stay high for extended periods of time. I intend to show how the recent fluctuations in the price of gasoline in the United States apply to the basic economic principle of Price Elasticity of Demand. I will show, through research of economic data how the demand for fuel has responded to the sales price at the pump in recent years as well as during the oil crisis of 1973 and 1980. 1973 -1974 Arab Oil Embargo First, let us start with a bit of history. Although the recent rise in price at the pump has been a burden on most of us, the economic and personal impact seems to have been far less than that of the oil shortages in 1973 and 1980. In 1973 Arab oil exporting countries refused to sell oil to nations that supported Israel in the Arab-Israel war. The effect of this decrease in supply in the United States was dramatic: "Within a few months, the price of oil went from around $3 a barrel to about $12. That sounds like a bargain, compared with just over $70 in April 2006. But expressed in today's dollars, the price went from around $10 a barrel to $40 a barrel. That's a huge increase...

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• Price Elasticity of Demand Essay

  ...Assignment 2 Price Elasticity Of Demand Price Elasticity of Demand is the quantitative measure of consumer behavior whereby there is indication of response of quantity demanded for a product or service to change in price of the good or service ( Mankiw,2007). The Price Elasticity of Demand is calculated using either the point method or the midpoint method. The Point Method Price Elasticity of Demand = Percentage change of Quantity Demanded Percentage change of Price The Midpoint Method Price Elasticity of Demand = (Q2 ' Q1) \ [ (Q2 + Q1)/2] (P2 ' P1) \ [ (P2 + P1)/2] Were: Q1= initial Quantity Demanded Q2 = new Quantity Demanded P1=Initial Price P2= new Price (Source : Mankiw 2007) A good or service can either be elastic, inelastic or unit elastic. When the price elasticity of demand of a commodity is elastic this is when the quantity demanded of a good or service responds significantly to the increase or decrease in price. Therefore after calculation the answer is greater than one making it elastic which means that increase in price decreases...

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• Essay about Price Elasticity of Demand

  ...Price Elasticity of Demand T's Jean Shop sells designer jeans. The latest trend setter has been Capri cuffed blue jeans. The demand for the Capri jeans has been very high with teenagers and young women. The business has increased its supply of Capri jeans due to the high demand. The owner, Terri Johnson, contemplates increasing the price from $9.00 to $10.00. Ms. Johnson needs to know the response of the consumers to the increased price. According to McConnell and Brue (2004), the Price Elasticity of Demand measures the rate of response of quantity demanded due to a price change (p. 1). Using Price Elasticity of Demand In calculating the Price Elasticity of Demand, we use the formula: percentage change in quantity demanded of product X Ed = percentage change in price of product X The percentage change in quantity demanded is divided by the percentage change in price. change in quantity demanded of X Ed = original quantity demanded of X change in price of X original price of X According to Economics.about.com, there is another way to view...

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• Supply and Demand and Price Elasticity Essay

  ...below to answer the following questions: a.   Calculate price elasticity at point S using the method E=ΔQ × P ΔP Q E=ΔQ P+ 90 100 ΔP × Q= −300× 60 =−0.5 b.   Calculate price elasticity at point S using the method E=P P−A E=P × 100 = 100 =−0.5 P−A 100−300 −200 c.   Compare the elasticities in parts a and b. Are they equal? Should they be equal? The values of E in parts a and b are equal, as they should be, because the two methods are mathematically equivalent formulas for computing price elasticity. d.   Calculate price elasticity at point R. E= P × 400 = 400 = −1. 33 P−A 400−700 −300 e.   Which method did you use to compute E in part d, E=ΔQ × P or E= P ? Why? ΔP Q P−A At point R, Q is not given, and ΔQ/ΔP cannot be computed. Thus E = P is the only method to use at point R. P−A Technical Problem 2 Chapter 7 2. The estimated market demand for good X is Qˆ = 70 – 3.5P – 0.6M + 4PZ where Qˆ is the estimated number of units of good X demanded, P is the price of the good, M is income, and PZ is the price of related good Z. (All parameter estimates are statistically significant at the 1 percent level.) a. Is X a normal or an inferior good? Explain....

  656  Words | 3  Pages

• Supply Demand and Price Elasticity Essay

  ...Supply, Demand, and Price Elasticity Supply, Demand, and Price Elasticity We use multiple products on a daily basis, from toothpaste to ink pens. Though we may use these items for mere moments, there is a different supply and demand cycle for them. Every product has a different supply and demand cycle, and this cycle varies throughout time. Some items may constantly be in demand, like cotton, and others may be in demand seasonally, like eggnog. These shifts in supply and demand may influence the price of certain products, how much of the product is available at any given time, etc. Commodities available during only peak times throughout the year may even be substituted with a similar item. These seasonal items are considered inelastic whereas easily substituted items possess elasticity. Price elasticity of supply is a way to measure the responsiveness of the quantity supplied to a change in price, measured by dividing the percentage change in the quantity supplied of a product by the percentage change in the product’s price (Hubbard186). Price elasticity of demand is a way to measure the responsiveness of the quantity demanded to a change in price, measured by dividing the...

  1072  Words | 3  Pages

• Supply & Demand, and Price Elasticity Essay

  ...Supply & Demand, and Price Elasticity All things in our society are connected in some way, for example, how humans relate to each other. Complex ideas and analysis are not without their own set of unique connections. The intricate theories of economics are a prime example of this connection. To gain an accurate understanding of how supply and demand are connected, and its role within the market, one must analyze the functions of each as separate entities, and how they relate to economics as a whole. To begin analysis, one must examine what causes change between supply and demand. Once this has been achieved, investigating how changes in price and quantity influence market equilibrium, and how the necessity of a good and the availability of substitutions impact price elasticity will need to be conducted. The final step will be to compare and contrast market systems and the role of an economist within these systems. In order to discover what causes change in supply and demand, people need to understand the definition, different forms, components, and principles. Supply is defined as the amount of product a producer is willing to provide or sell, while demand is the amount of product a buyer is willing to receive or buy. There are two forms of supply: individual and market. Individual supply is the amount of product offered at...

  1372  Words | 4  Pages