Econ answers

The elasticity of demand measures the buyer’s reaction to price as its changing. “Economists measure the degree to which demand is price elastic or inelastic with the coefficient E d, defined as E d = percentage change in quantity demanded of product X/ percentage change in price of product X” (McConnell, C. 2011). Therefore, Ed=∆Qd/∆Pd. When elasticity of demand is measured less than one, demand is considered to be inelastic. The coefficient in an inelastic range is less than one. When this takes place the percentage change in price is more than the percentage change in quantity. It can be said that when inelastic demand is present that quantity becomes less effected by price changing.

b. EXPLAIN how the total revenue test can be used to determine if a demand curve is elastic or inelastic. Use two graphs with numerical examples in your response. ( ____/5)

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.”

14. When the price increases from $4 to $6 and the quantity demanded decreases by 2 units, the price elasticity of demand is

____ 14. If an increase in the price of green ketchup increases the demand for red ketchup, then

A. The concept of elasticity of demand has played a major role in managerial decision-making. It has greatly helped managers in consideration of whether lowering a price will lead to an increase in demand of a certain product, and if so, to what extent and whether profits would increase as a result of doing so. In this case the concept of demand becomes advantageous in that:

Anderson, P. L. (n.d.). Price Elasticity of Demand [Mackinac Center]. Mackinac Center: Advancing Liberty and Opportunity. Retrieved March 13, 2013, from http://www.mackinac.org/article.aspx?ID=1247

Bailey had a rather large collection of Harley t-shirts, and they had been passed on to Tuck, who was his younger brother, but Tuck claimed that he fit into the shirts like a “stuffed sausage.” Clara had been saving every penny she could, and she decided that she wanted to get Tuck a quilt made from his brother’s Harley t-shirts. Last year, she had not had nearly enough money to have the quilt made. This year, money was even tighter, and she still did not have enough money to have the quilt made, especially because she wanted it made by the best in town. The quilt would cost about $400.000, and she had to come up with the money quickly, due to Christmas being just two months away, and the quilt-maker needing time to make the quilt.

Based on the above description, forms of elasticity will affect business decisions and pricing strategies differently depending on the nature and type of products or services being offered. Business organizations whose product offerings have elastic and perfectly elastic price elasticities of demand should not attempt to raise prices of their products because it will cause the quantity demanded and consequently total revenues to drop drastically. Businesses can there use the price elasticities of demand to determine whether the proposed changes in their prices will raise or reduce their total revenue. The following expression may be useful in helping business organizations to determine the impacts of elasticities on their total revenues based on the suggested price changes.

Since Blinkie’s Donut Emporium offers several different products, we decided to calculate the price elasticity of demand for their main product sold; donuts. Elasticity is determined by the percentage change in quantity demanded divided by the percent of change in the product price. The initial quantity demanded, being 5,000 sales a month later turned into 4,500 sales a month in response to the price change from $1 to $1.50. A $.50 cent increase in price led to a decrease in total quantity of donuts sold by 500. The percentage of change is a 50% increase in price along with a percent of change in quantity of -10%. Elasticity then becomes -10/50 giving us an elasticity of -.2, but since elasticity is always positive, the negative sign is disregarded. The number .2 elasticity is very close to being unitary elastic but still inelastic, meaning that the demand changes according to price at an almost equal rate. Therefore, we recommend that Blinkie’s Donut Emporium does not raise or lower the price to enhance sales, but keeps the price the same. They can increase the price by a few cents, but we believe leaving the price as is can avoid the loss of regular customers from a practical standpoint.

(d) Interpret the following Cross-Price Elasticities of Demand (XED) and explain the relationship between these goods. XED= +0.64 and XED= -2.6

2. What is the relationship between elasticity or inelasticity of demand and who bears the most burden (customer or business) of a tax on various products/services (see pages 84 and 85). (10 points)

In each of the following pairs, tick which of the two items is likely to have the more elastic demand. Give reasons for your answer.

Price elasticity of demand is the proportionate change in demand for a good, following an initial proportionate change in the good’s own price. Most goods are either elastic or inelastic. Elastic demand means that consumers are really sensitive to price changes. If the price goes down just a little, they'll buy a lot more. If prices rise just a bit, they'll stop buying as much and wait for prices to return to normal. Inelastic demand is demand for a good or service that does not increase or decrease in response to changes in price. Demand for goods that are life necessities, such

When price elasticity of demand is elastic, the coefficient will be greater than one. When a percent price change occurs quantity demanded responds strongly there will be a large change in quantities consumers purchase. There is price sensitive in this scenario. If price elasticity of demanded is inelastic the coefficient will be less than one. When a percent price change occurs quantity demanded does not respond strongly then there is a slight change in quantities consumers will purchase. There a weak price sensitive in this scenario. Lastly, if price elasticity of demanded is unit elastic the coefficient will be equal to one. Whenever there is a percent change in price there is an equally matched percent change in quantity demanded. This scenario is rare.