EGT1 Task 2

Topics: Consumer theory, Supply and demand, Price elasticity of demand Pages: 2 (1144 words) Published: December 14, 2014
EGT1 Task 2
A)
Elasticity of Demand pertains to the relationship of price and need of a product. If a price increases will the demand increase or decrease? When a demand is elastic, it means even a small change in price can cause a large change in the quantities consumers purchase. (McConnell, pg. 77) So for example in an elastic demand if you reduce the price of a good the demand will increase a large amount and revenue then increases. When the is inelastic, according to McConnell it means when there is a price change it only causes a small change in the amounts consumer purchase. This can result in less total revenue. If a company drops the price of something, even if they sell more it doesn’t mean they will make more overall. If it is inelastic, the revenue can drop. There is also something called perfectly inelastic, which means and change in price results in absolutely no change in demand. This is rare and an extreme situation. There is also demand in unit elastic which “demands occurs where a percentage change in price and the resulting percentage change in quantity demanded are the same”. (McConnell, pg. 77) B) Cross elasticity of demand measures two different products and their response to price changes. So if a consumer purchases one product cross elasticity measures how sensitive that consumer is to the change in the price of another product. It is measured by the percentage changes in demand for the first product that occurs in response to a percentage change in price of the second good. (McConnell, pg. 87) Substitute goods play a roll is this because this can be used with different brands. Say consumers buy toothpaste, they could buy Colgate or Crest. These would be substitute products. Or if they buy chips, Doritos or Lays. When the cross elasticity is positive it means if the price would increase in the Colgate, the demand for the substitute good, in this case Crest, would go up. This would go up because if Colgate is more expensive than Crest...
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