Price Elastcicity of Demand

Topics: Supply and demand, Elasticity, Price elasticity of demand Pages: 1 (312 words) Published: January 1, 2011
(a) (i) What is meant by 'cross-price elasticity of demand'?
It is a measure of the responsiveness of demand for a good to a change in the price of another good. This good can either be a substitute good or complementary good.

(ii) Comment on the cross-price elasticity of demand between platinum and gold.
When the price of platinum rises demand for gold rises. Because gold can be a substitute for platinum people will want to buy gold more when the price of platinum increases.

(b) With reference to the passage, assess the likely impact on one group of consumers of platinum of the 50% rise in its price.
For dentists, the rise in price has caused their costs to increase. This is because they use platinum as a hardening agent. This rise in the price of platinum made dentists look for substitutes like gold. Gold is now used as dental hardening agent because it is cheaper after the increase in prices of platinum.

(c) (i) The Russian government 'holding back stocks'.

(ii) The increased use of palladium by motor manufacturers.

(d) What might be deduced about the price elasticity of supply of palladium in both the short run and the long run? The price elasticity of supply of palladium in the short run is likely to be inelastic in the short and elastic in the long run. In the short run people will be demanding palladium in higher prices because there are few alternatives and the consumers buy it out of habit. However in the long run if prices of palladium keep rising, people will realize that the high prices of palladium is permanent thus resort in creating or finding alternatives to it, however this switch from palladium to other alternatives takes time. This means that in the long run its PED is likely to be elastic.
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