...C h a p t e r 4 ELASTICITY Topic: Calculating Elasticity Skill: Conceptual Price Elasticity of Demand 4) Topic: The Price Elasticity of Demand Skill: Conceptual 1) The slope of a demand curve depends on A) the units used to measure price and the units used to measure quantity. B) the units used to measure price but not the units used to measure quantity. C) the units used to measure quantity but not the units used to measure price. D) neither the units used to measure price nor the units used to measure quantity. A) B) C) D) When the quantity of coal is measured in kilograms instead of pounds, the demand for coal becomes more elastic. less elastic. neither more nor less elastic. undefined. Answer: C Topic: Calculating Elasticity Skill: Recognition 5) The price elasticity of demand equals A) the change in the price divided by the change in quantity demanded. B) the change in the quantity demanded divided by the change in price. C) the percentage change in the price divided by the percentage change in the quantity demanded. D) the percentage change in the quantity demanded divided by the percentage change in the price. Answer: A Topic: The Price Elasticity of Demand Skill: Conceptual 2) The price elasticity of demand depends on A) the units used to measure price and the units used to measure quantity. B) the units used to measure price but not the units used to measure quantity. C) the units used to measure...
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...Pepsi, A reflection on its price & income elasticity Laura-Ashley Williams Colorado Technical University Author Note This paper was prepared for [ECON212], [CS13-01], taught by [Professor James Pirner] on [July 23, 2014]. Introduction The product chosen was Pepsi. It is a product produced by PepsiCo, which is one of the world's top marketer of premium juices and soft drinks. PepsiCo offers products to over 200 countries and territories, and our Global Brands are our biggest sellers. Pepsi is a carbonated soft drink sold in stores, restaurants, and vending machines internationally. Pepsi-Cola was created in the late 1890s by Caleb Bradham, a New Bern, N.C. pharmacist. Pepsi is one of the world’s most iconic and recognized consumer brands globally. Today, the Pepsi portfolio includes three products - Pepsi, Diet Pepsi and Pepsi MAX — that each generates more than $1 billion in annual retail sales. Today, more than ever, consumers are seeking new options for their snacking and beverage occasions. And now, more than ever, PepsiCo is strongly committed to providing a wide range of foods and beverages, from treats to healthy eats. In order to understand how Pepsi remains a product that meets or exceeds the customers’ expectations, I will describe the price and income elasticity of the product. Also, explaining any cross-elasticities that are involved. Pepsi's Price Elasticity The elasticity of demand for a commodity is the rate...
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...Questions and Answers from Lesson I-7: Elasticity Practice Questions and Answers from Lesson I-7: Elasticity The following questions practice these skills: Use the midpoint method for calculating percent change. Compute price elasticity of demand. Identify elastic and inelastic demand according to the price elasticity of demand. For elastic demand, apply the negative relation between price and revenue. For inelastic demand, apply the positive relation between price and revenue. Remember demand is more elastic when there are more substitutes or closer substitutes. Compute the price elasticity of supply. Compute cross-price elasticities of demand. Relate cross-price elasticities of demand to gross substitutes and gross complements. Identify elastic and inelastic portions of a linear demand curve. Compute income elasticity of demand. Question: Amazon.com, the online bookseller, wants to increase its total revenue. One strategy is to offer a 10% discount on every book it sells. Amazon.com knows that its customers can be divided into two distinct groups according to their likely responses to the discount. The accompanying table shows how the two groups respond to the discount. Group A (sales per week) 1.55 million 1.65 million Group B (sales per week) 1.50 million 1.70 million Volume of sales before the 10% discount Volume of sales after the 10% discount a. Using the midpoint method, calculate the price elasticities of demand for group A and group B. b. Explain...
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...Chapter 4 Elasticity • • • • I. The price elasticity of demand measures how strongly demanders respond to a change in the price of a good. The price elasticity of demand can be used to make quantitative predictions of how changes affect the price and quantity demanded of a good. The income elasticity of demand measures how strongly demanders respond to a change in income, and the cross elasticity of demand measures how strongly demanders respond to the change in the price of another good. The price elasticity of supply measures how strongly suppliers respond to a change in the price of a good. Price Elasticity of Demand • In general, elasticity measures responsiveness. The price elasticity of demand measures how responsive demanders are to a change in the price of the good. This information is often useful for both businesses and governments. • The price elasticity of demand is a units-‐free measure of the ...
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...TYPES OF ELASTICITY Elasticity is a term widely used in economics to denote the “responsiveness of one variable to changes in another.” In proper words, it is the relative response of one variable to changes in another variable. The phrase “relative response” is best interpreted as the percentage change. The quantity of a commodity demanded per unit of time depends upon various factors such as the price of a commodity, the money income of consumers, the prices of related goods, the tastes of the people, etc., etc. Whenever there is a change in any of -the-variables stated above, it brings about a change in the quantity of the commodity purchased over a specified period of time. The elasticity of demand measures the responsiveness of quantity demanded to a change in any one of the above factors by keeping other factors constant. When the relative responsiveness or sensitiveness of the quantity demanded is measured to changes in its price, the elasticity is said be price elasticity of demand. When the change in demand is the result of the given change in income, it is named income elasticity of demand. Sometimes, a change in the price of one good causes a change in the demand for the other. The elasticity here is called cross electricity of demand. The three Main types of elasticity are now discussed in brief. (1) Price elasticity of demand The concept of price elasticity of demand is commonly used in economic literature. Price elasticity of demand is the degree of responsiveness...
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...Elasticity of demand is the degree to which demand for a good or service varies with its price. Elasticity of demand is seen most with confectionary and other non-essentials such as cars and appliances. Sales go up as prices go down and as prices go up sales go down. Cross-price elasticity measures the responsiveness of demand for a good that occurs in response to a percentage change in the price of another good. Complements are goods with a negative cross of elasticity demand. These goods are normally used with each other such as cars and gas. As the price of gasoline goes up the sale for cars goes down. In contrast, substitutes are goods with a positive cross elasticity demand. As the price of one good increases the demand for another good will also increase. As the price of butter increases consumers will buy more margarine. Income elasticity measures the change in quantity demanded of a good and the change in income for the people using that good. If income is increased by 20% and the demand for a good is increased by 30%, the income elasticity would be 1.5. When there is negative income elasticity, the increase in income will cause a decrease in inferior goods, and possible the increase in luxury substitutes. As income increases, the demand for inexpensive cars will fall and the demand for higher-end models increases. The inexpensive car is considered an inferior good . The opposite of inferior goods is normal goods. Normal goods have positive income elasticity...
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...PAPER FIRST SEM MBA MANAGERIAL ECONOMICS “Kinds Of Elasticity Of Demand” “Factors Influencing Elasticity Of Demand” GROUP 2 ROLL NO | NAME | 7 | PRAVEEN KUMAR K L | 8 | PRAVEEN R | 9 | PRITHVI LINGH HONNESH | 10 | PRITHVI P M | 11 | PRIYA DARSHINI B A | 12 | PRIYANKA JAHAGIRDAR | ------------------------------------------------- ABSTRACT From the managerial point of view, the knowledge of nature of relationship between demand and its determinants alone is not sufficient. What is more important is the extent of relationship or the degree of responsiveness of demand to the changes in its determinants. The degree of responsiveness of demand to the change in its determinants is called elasticity of demand. The concept of elasticity of demand plays a crucial role in business-decisions regarding maneuvering of prices with a view to making larger profits. Almost most businessmen are intuitively aware of the elasticity of demand of the goods they make, however, the use of precise estimates of elasticity of demand will add precision to their business decisions. In this paper we will discuss * The various kinds of elasticity of demand * The nature of change and how it affects the decision taking. * How demand decisions in response to price changes vary for different types of goods? * Factors influencing the elasticity of demand INTRODUCTION Governments, business firms, supermarkets, consumers...
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... 1. Elasticity of demand measures the change in the quantity demanded due to the price changes in the market. This can also be characterized as a change in percentage to both the quantity demanded and the price. Durable items, such as appliances or automobiles, show elasticity of demand because these products can be bought infrequently and are not a consumer necessity. These durables can be purchased at leisure or when the prices are low. Elasticity of demand is measured by the number of substitutes available, the degree of necessity, and the price of a good as a proportion of income. Cross-price elasticity is a measure between the price changes or demand for one good affects the change in the price of another good. When the cross-price elasticity is negative, goods are referred to as complements. If there is an increase in price of a good that results in the decrease of the quantity demanded of another product, then both products are considered to be complements of each other. When the cross-price elasticity is positive, goods are called substitutes. If there is an increase in the price of one product that results in the increase of the quantity demanded of another product, then both products are seen as substitutes. Because of cross-price elasticity, goods that compete with one another are often paired together in the market (economics.about.com). Income elasticity measures the change between the quantity of a good demanded and a change in income. Income elasticity is the...
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...inelastic demand Elastic and inelastic demand Task A 1. Elasticity of Demand measures sensitivity of the demand for a good to a price change. If the price of a good matters little, a change in the price of that good will have a small impact on one’s willingness to sell or buy and this would indicate an inelastic situation. However, if a small change in prices causes substantial changes in one’s willingness to buy or sell, the good is said to be elastic. McConnell, Brue, and Flynn (2012) note that when demand is elastic a decrease in price will increase total revenue because even though the price is less the additional goods sold make up the difference. Conversely, if the demand is inelastic, price decreases reduce total revenue. When the percent of increase or decrease in the price of a good is equal to the demand percentage the case is unit elastic. 2. Cross-price elasticity of demand measures the sensitivity of quantity demanded of a good when the price changes on another good. When two goods are substitutes, the price of one good increases the demand for another good. Airlines A and B have routes that are the same. As airline, A raises the price of their tickets consumers will likely change to airline B. This is a simple explanation of substitution. A good is considered a complement to another when the demand of product A is increased after the price of product B is decreased. 3. Income elasticity measures the relationship between a change in demand for a...
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...Elasticity of Demand Concepts and Measurement In economics, the demand elasticity refers to how sensitive the demand for a good is to changes in other economic variables. Demand elasticity is important because it helps firms model the potential change in demand due to changes in price of the good, the effect of changes in prices of other goods and many other important market factors. A firm grasp of demand elasticity helps to guide firms toward more optimal competitive behavior. Rate at which demand changes due to particular change of price of the commodity or price of other commodity or income of the consumer is called elasticity of demand. Elasticities greater than one are called "elastic," elasticities less than one are "inelastic", and elasticities equal to one are "unit elastic". Elasticities equal to infinity is called "perfectly elastic demand". Also elasticities equal to zero is called "perfectly inelastic demand". Demand elasticity is a measure of how much the quantity demanded will change if another factor changes. One example is the price elasticity of demand; this measures how the quantity demanded changes with price. This is important for setting prices so as to maximize profit. When price elasticity of demand is elastic, the firm should lower prices, since it will result in a big uptick in demand, increasing your total revenue. When price elasticity of demand is inelastic, the firm should increase prices because there will be only a...
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...Elasticity of Demand refers to the degree of responsiveness of quantity demanded to the changes in the determinants of demand i.e. price of the good, consumer income and price of related goods. There are three quantifiable determinants of demand and hence elasticity of demand can be of three types; * Price Elasticity of Demand Price Elasticity of demand is the degree of responsiveness of demand to a change in its price. In technical terms it is the ratio of the percentage change in demand to the percentage change in price. There are a number of factors that determine the price elasticity of demand. * If close substitutes are available then there is a tendency for customers to shift from one product to another when the price increases and demand is said to be elastic. For example, demand for two brands of tea. If the price of one brand, say Brand 1, increases then the demand for the other brand, say brand B increases. In other words greater the possibility of substitution greater the elasticity. * The amount of income spent by the customer on a commodity plays a great role in determining the price elasticity. The elasticity of the commodity will be more when the proportion of income spent on it is more. * The usefulness of the commodity is an important factor in determining the elasticity. If the commodity can be put to many uses then the elasticity will be greater. * If two commodities are consumed jointly i.e. complements, then increase in...
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...Exercise 6 Solution Chapter 6 Elasticity: The Responsiveness of Demand and Supply 6.1 The Price Elasticity of Demand and Its Measurement 1) Price elasticity of demand measures A) how responsive suppliers are to price changes. B) how responsive sales are to changes in the price of a related good. C) how responsive quantity demanded is to a change in price. D) how responsive sales are to a change in buyers' incomes. Answer: C Comment: Recurring Diff: 1 Page Ref: 168-169/168-169 Topic: Price Elasticity of Demand Objective: LO1: Define price elasticity of demand and understand how to measure it. AACSB: Reflective Thinking Special Feature: None 2) If the percentage increase in price is 15 percent and the value of the price elasticity of demand is -3, then quantity demanded A) will increase by 45 percent. B) will increase by 5 percent. C) will decrease by 45 percent. D) will decrease by 5 percent. Answer: C Comment: Recurring Diff: 2 Page Ref: 168-169/168-169 Topic: Price Elasticity of Demand Objective: LO1: Define price elasticity of demand and understand how to measure it. AACSB: Analytic Skills Special Feature: None 3) If demand is inelastic, the absolute value of the price elasticity of demand is A) one. B) less than one. C) greater than one. D) greater than the absolute value of the slope of the demand curve. Answer: B Comment:...
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...4 Elasticity 4.1 Price Elasticity of Demand 1) A price elasticity of demand of 2 means that a 10 percent increase in price will result in a A) 2 percent decrease in quantity demanded. B) 20 percent decrease in quantity demanded. C) 5 percent decrease in quantity demanded. D) 2 percent increase in quantity demanded. E) 20 percent increase in quantity demanded. Answer: B Diff: 2 Type: MC Topic: Price Elasticity of Demand 2) The price elasticity of demand is a units-free measure of the responsiveness of the ________ when all other influences on buying plans remain the same. A) quantity demanded to a change in the price of a substitute or complement B) quantity demanded to a change in income C) quantity demanded of a good to a change in its price D) price to a change in quantity demanded E) none of the above Answer: C Diff: 1 Type: MC Topic: Price Elasticity of Demand 3) The concept used by economists to indicate the responsiveness of the quantity demanded of a good to a change in its price is the A) cross elasticity of demand. B) income elasticity of demand. C) substitute elasticity of demand. D) price elasticity of demand. E) elasticity of supply. Answer: D Diff: 1 Type: MC Topic: Price Elasticity of Demand 4) If a 10 percent rise in price leads to an 8 percent decrease in quantity demanded, the price elasticity of demand is A) 0.8. B) 1.25. C) 8. D) 0.125. E) 80. Answer: A Diff: 2 Type: MC Topic: Price Elasticity...
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...309.1.2 Supply and Demand A. 1) Elasticity of demand refers to the way that customers feel about and react to changes in price. Formulas are used by economists to measure elasticitiy in price (and more). This compares the old price with the new and calculates demand for the goods/services offered. 2) Cross-price elasticity “measures how sensitive consumer purchases of one product (say, X) are to a change in the price of some other product (say, Y).” (McConnell, Brue, Flynn. Economics. 19. VitalSource Bookshelf. McGraw-Hill Learning, 2011. Retrieved Sept. 2012.) A great effect to positive cross-price elasticity is when both products benefit from higher demand. Although only 1 product (X) has been changed, it directly affects the other product (Y) in a positive way. Goods that are considered substitutes often have similar product types and purposes. I.e. Coca-cola brand soda may be considered a substitute for Pepsi cola. If one of the soda brands offer their product at a higher price, this could creater higher demand for the substitute or competing product. Complements are goods that can be combined with others. For example, in asian markets, soy sauce is often a complement to rice. If the price in soy sauce is dramatically lowered, this may create a higher demand for the rice to go with it. 3) As the income of customers change, so their buying habits. Income elasticity of demand measures the change that occurs due to the income specifically (rather than...
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...document subtitle] | Elodie Henry | Elasticity of demand | a) Explain the concepts of price elasticity of demand, income elasticity of demand, and cross elasticity of demand. In economics, demand elasticity refers to the responsiveness of demand due to changes in other economic variables. It is an important concept introduced by the economist A. Marshall, which helps firms to anticipate effects of changes in economic variables so as to adopt an optimal competitive behavior. To better understand the concept of elasticity of demand we will first concentrate on the economic factors affecting demand. Demand is referred to as being the amount of goods and services that consumers want and have the capacity to buy at a specific price and location for a particular period in time. It is very important for demand to be effective that the consumers have the purchasing capacity and willingness to buy the goods or services. There are five main factors that determine the demand for a good; the price of the product, the prices of other products, the consumer’s income and wealth, the consumer’s tastes and the various individual- specific or environmental factors. For the concern of this essay we are going to concentrate on the 3 first determinants of demand mentioned above and how they are measured. The first factor influencing demand is the price of the good itself. Consumers react according to the price set by the producer. The lower the price the greater will be the amount of goods...
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