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Egt 1 Task 2

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Western Governors University
Economics and Global Business Task 2

Egt1: Task 2

A)
Elasticity of demand is describes as the degree of percentage change in demand for a good or service due to variation in price. Elasticity measurements can be expressed by three types of demand; inelastic demand, unit elastic demand, or relatively elastic demand. To determine the percentage of change in demand for a product or service the price elasticity equation and coefficient are used. The coefficient Ed is defined as “the percentage change in quantity demanded of product divided by the percentage change in price of product X” (McConnell, Brue, Flynn, 2012, pg. 76)
The three expressions of Ed are Elastic, Inelastic, and Unit Elasticity. Elastic demand occurs “if a specific percentage change in price results in a larger percentage change in quantity demanded” (McConnell, Brue, Flynn, 2012, pg. 77). For a product with inelastic demand Ed < 1. An example of elastic demand is when there is a 2% decrease in the price of chocolate that results in a 6% increase in quantity. Ed= .06/.02 = 3
Inelastic demand occurs “if a specific percentage change in price produces a smaller percentage change in quantity demanded.”(McConnell, Brue, Flynn, 2012, pg. 77) For products with inelastic demand Ed <1. An example of inelastic demand is when there’s a 2% decrease in the price of milk that results in a 1% increase of demand. Ed= .01/.02 = .5
Unit elasticity of demand occurs “where a percentage change in price and the resulting percentage change in quantity demanded are the same” (McConnell, Brue, Flynn, 2012, pg. 77). An example of unit price elasticity occurs when there is a 3% decrease in price of ground beef that results in a 3% increase of demand in ground beef.
B)
Cross price elasticity is also referred to as “cross elasticity of demand.” Cross price elasticity of demand measure the responsiveness of the demand for a good or service as it relates to a change in the price of another good or service. The coefficient that represent cross price elasticity is Exy. Exy is the change in percentage of quantity demanded of product x divided by the change in percentage of the price of product Y. Price elasticity can help to determine if a good is a substitute or complementary good.
Substitute goods are goods that can replace another if or when the price increases. In order for a good to be considered a substitute, the cross-price elasticity if demand must be positive. This means the change in sales of product X and change in the price of product Y move in the same direction. An example is Sparkletts water (X) and Arrowhead water (Y). An increase in the price of Sparkletts water (X) causes consumers to purchase more Arrowhead water (Y) resulting in positive cross price elasticity.
Complimentary goods are goods that “go together”. In the consumer marketplace, where the increase price of one product (x), creates a decrease demand for another product (Y) and vice versa. An example is the decrease of price in cell phones (x), will cause an increase in the amount of phone cases (Y) purchased. Exy < 0.
Substitute goods have a positive cross elasticity and coefficient. The larger the coefficient, the greater substitutability. Complimentary goods have a negative cross-elasticity coefficient. The larger the coefficient the greater the substitutability. Complimentary goods have a negative cross-elasticity coefficient. The larger the coefficient, the greater is the complimentary.
C)
Income inelasticity of demand measures how consumers buy more or less of a produce in response to a change in their income. The coefficient Ei is determined by the equation: Percentage change in quantity demanded/ percentage change in income. Whether or not the demand for a product or service increases as income rises will categorize that product as a normal good or inferior good. For a good to be considered normal or superior, the income- elasticity coefficient Ei has to be positive, Ei > 0 .Inferior goods are goods that yield a negative income elasticity, Ei < 0. As consumer incomes increase, demand and purchases of these foods decrease. Examples of inferior goods are bus tickets, consignment clothing, and retreaded tires to list a few.
D)
Demand of a product will be elastic when there is a higher number of substitute available. This happens because consumers can easily swap one product for the other based on price. An example can be the purchase of soda. A consumer can go to the store to buy Pepsi but arrive and find a sale on Coke and buy Coke instead. The variety of soda a consumer can chose, makes the demand for Pepsi highly elastic. The same rule applies for inelastic demand of a product. If there is a limited number of substitute goods available the product or service is highly inelastic. An example would be medical procedures or surgery. The alternative to surgery are very few, making medical procedures or surgery inelastic.

E)
The proportion of Income devoted to a good or service effects the elasticity of demand for that good or service. For goods that are of a higher proportion of income, a 15% increase in price would make the good highly elastic. But for goods that are of a lower proportion of income, a 15% increase in price would only slightly change the demand, making them lower in elasticity. An example would be a car priced at $13,000. If there is an increase by 15% the car now costs $14,950. This increase in price requires more of the consumer’s income making them highly elastic. Another example of how proportion of income devoted to a good effects elasticity of demand, is a pair shoes that cost $20.00. If there is a 15% price increase on the shoes, they now cost $23.00. The increase in the price of the shoes requires about the same proportion of income that the original price required. The lack of major proportional change to income makes the shoes elastic.

F)
Time is a factor that effects consumers demand elasticity of a product. “Short-run” demand for a product is often more inelastic than “long-run” demand since consumer have less time to find an alternative and normally don’t feel the effects of a price increase until “long-run.” An example would be an increase in the price of salmon. “Short-run” demand of Salmon is more inelastic since the effect if the price increase hasn’t been felt drastically by consumers. But, in the “long-run” demand for salmon will decrease making it more elastic as consumers find alternative to salmon.

G)
1) Elastic demand range occurs when total revenue can be increased by decreasing price. The range for elastic demand on the graph is between $80 and $50. Total revenue increases as the price decrease.
2). Inelastic demand range occurs when total revenue can be increased by increasing price. The range for inelastic demand on the graph is between $40 and $0. Total revenue is decreasing as the price decreases.
3). Unit elastic range occurs when a percentage change in price results in the exact same percentage change in quantity. When the price changes it does not affect total revenue on the graph. The unit elastic range for the given graph is $50-$40.

References
McConnell, Campbell R., Stanley L. Brue, and Sean Masaki Flynn. "Elasticity." Economics: principles, problems, and policies. 19th ed. New York: McGraw-Hill/Irwin, 2012. 76-77. Print.…...

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