Elasticity

Elasticity

Introduction:
Economists use elasticity to measure consumer responsiveness to changes in the various determinants associated with demand. Elasticity addresses percentage changes i.e. a percentage change in quantity demanded divided by a percentage change in (own price, the price of another good, or income). Understanding elasticity is important to businesses and policy makers alike as they consider how a potential change will impact markets when consumers adjust their purchasing behaviors.

Tasks:

A. Discuss elasticity of demand as it pertains to elastic, unit, and inelastic demand.
B. Discuss cross price elasticity as it pertains to substitute goods and complementary goods.
C. Discuss income elasticity as it pertains to inferior goods and to normal goods (sometimes also called superior goods).
D. Use an example to discuss why demand tends to be relatively elastic in a situation where “Availability of Substitutes” exists.
E. Discuss the “Proportion of Income Devoted to a Good” concept by contrasting two products typically purchased each month.
1. Address, in your discussion, specific examples of how the same percentage change in the price of both goods affects the percentage change in the quantity demanded for each of the two goods.
F. Contrast how a person would initially respond to a relatively large increase in the price of a product in the short run as opposed to how that same person might react to that same price increase over a longer time horizon (i.e., the long run), using the “Consumer’s Time Horizon” concept.
G. Identify by price range the areas on the demand curve where demand is elastic, inelastic, and unit elastic using the attached “Graphs for Elasticity of Demand, Total Revenue.”
1. Explain the corresponding impact on total revenue for each of the three price ranges indentified in part G.

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