1. What are the (3)three Determinants of Demand Elasticity. Briefly explain and give examples for each of the determinants
1. Availability of substitutes
The demand for a good is often influenced by changes in the prices of other goods. The nature of the impact depends on whether the goods are substitutes or complements Substitutes are goods that have essentially the same use. When the price of a good goes up, the demand for its substitutes likely to increase. For example 7-up and Sprite are similar lemon-flavored soft drinks An increase in the price of Sprite would cause people to purchase less of that beverage and consume more 7-Up.
Demand is also affected by the amount of income that consumer has available to spend. For most goods, an increase in consumer income resulted in an increase in demand for many goods and service. For example government has increase income for the government servant as a result an increase of price of many goods.
These preferences can change rapidly in response to advertising, fads, and customs. For example pants for women have become more popular in recent years. In this case, the shift in preferences resulted in an increase in demand, with more women’s pants now demanded at each price.
2. Is there a difference between types of Demand Elasticity and Degree of Elasticity of Demand? Explain...
Type of Demand Elasticity:
Price Elasticity of Demand
It measures the relative responsiveness of consumers on quantity demanded as a result of change in its price.
Income Elasticity of Demand
It measures the relative responsiveness of quantity demanded as a result of change in consumer’s income. Objective to identify types of goods such as Normal good i.e. Luxury Goods or Necessity good, Inferior Goods, Essential Goods
Cross Elasticity of Demand
It measures the relative responsiveness on quantity demanded i.e. (change in Qx) due to a change in price of related product (changes in Py). It is to establish the relationship between good X and good Y.
Degree of Elasticity of Demand:
Elastic Demand
e.g. [ Ed] > 1
[Ed] = 1.5 (since, 1< Ed< infinity, the demand is elastic)
This mean that 1% increase in price cause 1.5% decreases in quantity demanded
Inelastic Demand
[ Ed] < 1 e.g. [-0.3] < 1
This means that 1% increase in price cause 0.3% in quantity demanded
Unitary Elasticity of Dem
[ Ed] = 1 e.g. [-1] = 1
This means that a 1% decreases in price causes a 1% increase in quantity demanded.
Perfectly Inelastic Demand
e.g. [ Ed] = 0
This means that quantity demanded is fixed at all times regardless of the change in price.
Perfectly Elastic Demand
e.g. [ Ed] = infinity
This means that if price change by a small amount, quantity demanded change by an infinite numbers (very large)
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