EGT1 Task 2

Topics: Supply and demand, Price elasticity of demand, Consumer theory Pages: 3 (852 words) Published: July 26, 2014
EGT1 Task 2:

Elasticity of demand, also known as price elasticity of demand is defined as: measuring the responsiveness of demand to changes in price for a particular good. If the price elasticity of demand is equal to 0, demand is perfectly inelastic. Values between zero and one indicate that demand is inelastic. When price elasticity of demand equals one, demand is unit elastic. Finally, if the value is greater than one, demand is perfectly elastic. (Investopedia US, A Division of ValueClick, Inc., 2013) A perfectly elastic demand curve is horizontal and a vertical curve represents a perfectly inelastic demand curve. Elastic demand is a large change in quantity purchased for a given price change. The coefficient ends up as greater then one because the numerator is larger then the denominator in the equation. With inelastic demand there is a small change in quantity purchased for a given price change. The coefficient ends up less than one because the numerator is smaller then the denominator in the equation. Unit elastic is the quantity demanded and own price change the same percentage. The coefficient ends up being equal to one because the numerator and denominator are the same.

Cross price elasticity of demand can be defined as measuring the percentage change in demand for a specific good caused by a percent change in the price of another good. There are two kinds of goods, complements and substitutes. Complement goods are goods that are used with one another for example gas and cars; one is not useful without the other. If the cost of gas rises, the demand of cars will decrease, therefore with complementary goods the cross elasticity demand is negative. Unlike complement goods, substitute goods result in a positive cross elasticity demand. An example of substitute goods would be Dunkin Donuts coffee and Starbucks coffee, same product different brand.

Income elasticity of demand can be defined as measuring the percentage change in demand...

Cited: Investopedia US, A Division of ValueClick, Inc. (2013, December 1). Price Elasticity of Demand. Retrieved January 12, 2014, from Investopedia: http://www.investopedia.com/terms/p/priceelasticity.asp
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