EGT 1 task 2

Topics: Supply and demand, Price elasticity of demand, Consumer theory Pages: 3 (824 words) Published: September 27, 2014
EGT 1 Task II

A. Elasticity of demand is the consumer’s response to the change in price. The demand of a product varies with the price. There are three categories of elasticity of demand; elastic, inelastic and unit elasticity.

Elastic demand is one in which the change in quantity the consumer demands is due to the change in price of the product being larger. Inelastic demand is one in which the change in quantity demanded due to a change in price is small. Inelastic demand usual causes a negative effect on the product. Elasticity of demand is measured by dividing the percentage change of the quantity demanded by the percentage change of the price.

Unit elastic is any change in price that causes an equal change in quantity. Price changes and quantity changes stay the same. The percentage change in quantity is equal to the percentage change in price. Unit elastic supply will occur when the seller can choose a substitute for the higher price product.

B.The measure of the rate of response of the amount of a demanded product due to the price change of other goods is cross price elasticity demand. When products are substituted with a cheaper product, we expect to see the consumer purchase more than one of the product when the substituted price is increased. If the products are similar we should see a price raise in the product cause the demand for both products to drop.

C.Income elasticity is how much of your income will spend on different types of products. Your income decides what type of products is purchased. The percentage of your income spent on normal goods which include a vehicle payment, groceries and normal goods you would purchase every month. Normal goods are also referred to as Superior goods. Superior goods have positive income elasticity. With superior goods if income raises the expenditures will also rise. Superior goods are also a wide quality distribution.

Inferior goods are inelastic; depending on your income...
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