elasticity+of+demand

The own price elasticity of demand measures the responsiveness of quantity demanded to changes in price. In other words, it is a measure of how much demand will change, based on a corresponding price change. Consumers ultimately base their consumption habits based on a number of factors, and the price of a certain good is one of these factors. The own-price elasticity of demand is a way to measure how price-consious or price-sensitive consumers are (for a given product or service). There are some markets where a small change in price will lead to a drastic change in the quantity demanded, this would be true in industries where there are very close substitutes for a product. Consumers see the price of Good X increase by just a little bit, but this increase is enough to get consumers to shift their consumption habits to substitute more of good Y and less of good X (if the two are close substitutes). In other product segments, there are not close substitutes, so consumers will not drastically alter their consumption patters based on a shift in price.
 * Elasticity of Demand**

(Anonymous 2007)

Real Life Examples: Consider the market for insulin, which Diabetics need to maintain their quality of life. If the price of insulin goes up, diabetic people really don't have much of a choice and they will not shift away from buying insulin and buying something else. The market for insulin could be considered highly inelastic, meaning that the quantity demanded is not very responsive to a change in price.

Consider individual's income and the type of house they will buy. As individual's income increases they are more likely to purchase a larger home. In this example the housing market is inelastic to peoples income. As people make more they are able to spend more on housing and therefore makes it price inelastic.


 * 1) **The value of price elasticity of demand:**
 * A.** **depends on the units that are used to measure quantities**
 * B.** **has the same value as the slope of the demand curve**
 * C.** **depends on the units that are used to measure prices**
 * D.** **does not depend on the units in which quantity and price are measured.**
 * The answer for #1 is D.** The price elasticity of demand compares the //percentage// change in quantity to the //percentage// change in price. Because a percentage change is the same regardless of the units used (e.g. whether price is measured in pence or pounds) the value of elasticity does not depend on the units in which quantity and price are measured.

So, only D is correct here. Answers A, B and C would imply a //more inelastic// demand.
 * 2. Demand for a good is likely to be more elastic:**
 * A.** **the smaller the fraction of consumer income absorbed by the good**
 * B.** **in the short run than in the long run**
 * C.** **the more broadly defined the good**
 * D.** **the greater the number of available substitutes for the good**
 * The answer for #2 is D.** The magnitude of the price elasticity of demand of a good depends on several factors - the availability of substitutes, the proportion of income spent on the good, and the time period. Demand tends to be more elastic:
 * The greater the number of substitutes - if the price rises you can easily buy something else
 * The greater the proportion of income spent on the good - a rise in the price has a large impact so you try to economize on the good
 * The longer the time period - you have more time to adjust your spending patterns and find alternative goods.

A. Quantity demanded decreases by 20% B. Quantity demanded increases by 20% C. Quantity demanded increases by 1.25% D. Quantity demanded stays the same**
 * 3. If the own price elasticity of a good is -4, what will happen to quantity demanded if price increases by 5%

%Change Qd(x) / %Change P(x) we know that Elasticity-4 and the denominator. Using algebra, we find that the numerator is -20. That is, the quantity demanded will decrease by 20%. -20/5
 * The answer for #3 is A**. Using the equation Elasticity (x)

4. If the quanity demanded increases as price goes up is is: a. elastic b. inelastic c. unitary elastic d. perfectly elastic Answer b: Think of a rubber band - as price goes up and people demand more the rubber band moves in the same direction, making it inelastic. If price went up and demand went down the rubber band would be stretched and be considered elastic.

5. Given the increasing cost of gas and individuals making fewer trips because of gas prices we would say gas is: a. elastic b. inelastic c. unitary elastic d. perfectly inelastic Answer a: When the price of gas goes up the amount of trips decreases. When we think about a rubber band when the price of gas goes up, lesiure trips go down the rubber band is stretched out and more elastic.

Anonymous (2007). //Demand Elasticity and Total Expenditure//. Retrieved April 24, 2007 from AmosWEB. Web site: http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=demand%20elasticity%20and%20total%20expenditure

Beachill, B. (1998). //Economics Resources//. Retrieved March 26, 2007 from Leeds Metropolitan University, Economics. Web site: http://www.lmu.ac.uk/lbs/epia/people/beachill/index.html

Baye, Michael. (2006). Managerial Economics and Business Strategy 5th edition. McGraw Hill, New York.

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