EGT Task 1
A. Demand of a unit is inelastic when the price is one and the increase to price makes the revenue higher. Elastic demand occurs when the price is higher than one and with the fluctuation of prices increase and decreases total revenue will incline or decline. A good example would be when the demand measurement is changed as when a company lowers the price products to boosts or increase sales.
B. The cross elasticity of demand measures how sensitive consumer purchases of one product (say, X) are to a change in the price of some other product (say, Y). We calculate the coefficient of cross elasticity of demand Exy just as we do the coefficient of simple price elasticity, ...view middle of the document...
3. Income elasticity measures what affect a change in a purchaser’s income has on the demand of all products. Analysts use income elasticity as a tool to measure the demand of certain products according to the state of the economy. For example, during a downturn in the economy, less money will be spent on higher priced, or more elastic goods, such as cars and houses.
1. The availability of substitutes would tend to be more elastic if there are more close substitutes available for a specific product. If few close substitutes are available for a specific product, that product will tend to be more inelastic.
2. The share of a consumer’s income devoted to a good will tend to be more or less elastic relevant to the percentage of the consumer’s budget that the particular good requires. The consumer will pay more attention to a price increase on elastic purchases such as automobiles because it is a large part of their income. The consumer will pay less attention to a price increase on inelastic purchases such as candy bars because it is a small part of their income.
3. A consumer’s time horizon affects elasticity much in the same way as their income. The more time you have to search for products, the more elastic the purchase as you have time to find a large variety of suitable substitutes. The less time you have to search for products, the more inelastic the purchase, because you do not have the time to search out a large variety of alternatives.
1. If there are more close substitutes available for a product, for example sodas, the demand will be more elastic because as prices rise for a particular brand of soda, people will switch to a comparable brand that costs less. If there are few close substitutes available for a product, for example insulin, the demand will be more inelastic because people will pay whatever price for insulin because there are no close substitutes. The logical impact to business decision making is that if the demand is elastic, price and total revenue move in opposite directions. For example, if the soda maker lowers its price on sodas, its total revenue will increase as more people will purchase the cheaper sodas. However, if the demand is inelastic, price and revenue move in the same direction. If the insulin manufacturer raises its price on insulin, its revenue will also rise because the same people will still need the insulin and there are no close alternatives for the consumer.
2. An automobile purchase will be more elastic because it is a large part of a consumer’s budget. Candy bars, on the other hand, will be inelastic because they represent a very small percentage of the consumer’s budget. The logical impact to business decision making is that the more elastic the product, the more competitive the pricing will have to be because the consumer will be looking for the cheapest price because the item represents such a large part of their budget. The more inelastic the...