EGT1 Task 2

932 WordsSep 21, 20134 Pages
A. Discuss elasticity of demand as it pertains to elastic, unit, and inelastic demand. Elasticity of demand is gauged by the percentage of change in demand when the price of an item varies. If the change in the quantity demanded is greater than 1 the demand is elastic. Elasticity of demand is calculated by ED=quantity demanded/decrease in price. If you reduce the price of milk by 6%, and that causes an increase of quantity demanded by 9% the demand for milk is elastic (ED= .09/.06 = 1.5). Unit elasticity is when the change in demand for an item is equal to the change in price. In this example the price of milk is reduced by 3% which in turn results in an increase of demand by 3% t. When the change in price percent is less…show more content…
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. When there is a large increase in the price of a product in the short run it results in inelastic demand because there is little time to adjust to the increase and find an alternative product. Let’s say the consumer uses the local bus service to go to work. On the way to work one day he notices that the prices of transportation will double beginning tomorrow. In the short time he may be forced to continue paying the higher prices until he can find alternative transportation. As time passes, the consumer can make alternative choices such as carpooling, working from home, or riding a bike to work; therefore, the cost increase for the transportation would be elastic. 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 identified in part G. The Demand unit elastic occurs at the production of 4 units at a price of $50.00 because neither

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