EGT1 Task 2

Topics: Supply and demand, Price elasticity of demand, Consumer theory Pages: 3 (932 words) Published: September 21, 2013
A. Discuss elasticity of demand as it pertains to elastic, unit, and inelastic demand.

Elasticity of demand is gauged by the percentage of change in demand when the price of an item varies. If the change in the quantity demanded is greater than 1 the demand is elastic. Elasticity of demand is calculated by ED=quantity demanded/decrease in price. If you reduce the price of milk by 6%, and that causes an increase of quantity demanded by 9% the demand for milk is elastic (ED= .09/.06 = 1.5).

Unit elasticity is when the change in demand for an item is equal to the change in price. In this example the price of milk is reduced by 3% which in turn results in an increase of demand by 3% t.

When the change in price percent is less than the change in demand percent, this is referred to as inelasticity. For this example, let’s say we have a 6% reduction in the price of bread but it only increases the demand by 3%.

B. Discuss cross price elasticity as it pertains to substitute goods and complementary goods. Cross-price elasticity measures the responsiveness of the demand for a good to a change in the price of another good. When measuring the cross price elasticity, the coefficient can be either negative or positive (McConnell, 2012). Substitute Goods is a positive cross elasticity. When similar manufactured goods move in the same direction when there is a change in price. Let’s compare iPads and Tablets, when the price of the iPads increases, the demand for Tablets increases. Complementary Goods are negative cross elasticity. This happens when products move in the opposite direction as the sales of another product. An example of this would be laser printer and ink cartridges. When the price of printers decreases, the demand for ink cartridges would increase. The larger the negative cross-price elasticity confident, the greater is the complementarity between the two goods.

C. Discuss income elasticity as it pertains to inferior goods and to normal...
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