EGT1 - Task 2 Essay

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EGT1 – Economics and Global Business Applications
Task 2

Elasticity of demand is a measure of responsiveness to a price change of a good or service. When demand is elastic, the percentage of a price change of a product will result in a larger percentage of quantity demanded (McConnell, p 77). It basically means reducing the price of a good service will result in a greater quantity demanded and an increase in revenue for the seller. When demand is inelastic, a change in price will result in a reduction of quantity demanded, which will then lead to a revenue decrease (McConnell, p 77). To demonstrate elastic and inelastic demand results, Company A sells 100 pens at $1.00 a piece each day, making their revenue $100.00. Company A
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A negative cross elasticity of demand in complementary goods means that the increase in price of one good, an example being potato chips, will decrease the demand for the complementary product that goes with it, the dip.

Income elasticity measures the responsiveness of consumers to changes in their incomes (McConnell, p 88). Demand for normal goods tends to increase as consumers’ incomes increase and conversely, demand for inferior goods tends to decrease as consumers’ income increases.

Demand is elastic where there is a large availability of substitutes. The reason for this as the price of a good increases, if there is a large amount of substitutes for this particular good, the consumer will choose the substitute. As discussed earlier, soda is an excellent example of this elasticity. Airline tickets are another example. As one airline raises its cost of a ticket or to even pay for a bag to be checked, a consumer will more likely choose a cheaper ticket or an airline that doesn’t charge for baggage over the original. If there is no (or a very limited) amount of substitutes for a good, elasticity is said to be negative. A price change in medication will not likely change the behavior of a consumer relative to demand since there isn’t a substitute to taking the medication. Household utilities are another example of a limited amount of substitutes.

In discussing the proportion if one’s income devoted to a good concept, the

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