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Section 1.2a What is Elasticity?

Elasticity is a measure of response and is often used to measure how supply—and especially demand—responds to different influences. Directions: Research how the following measures are applied, and write a formula for measuring each type of elasticity. Be sure to provide examples to show your understanding.

Price Elasticity of Demand – ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Cross-Price Elasticity - ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Income Elasticity of Demand - ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Price Elasticity of Supply - ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Section 1.2b Cross-Price Elasticity

Directions: Research the following and write a specific definition in your own words.

What is a substitute good? - ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

What is a complimentary good? - ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

With the help of an example, explain why a firm would be interested to know what the cross prices elasticity of demand for their good or service would be helpful in planning their business. - ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Section 1.2c Income Elasticity of Demand

Directions: Research the following and write a specific definition in your own words.

What is a luxury good? - ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

What is an inferior good? - ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

What is a normal good - ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Section 1.2d Price Elasticity of Supply

Directions: Research the following and write a specific definition in your own words.

Please define, with the help of an example, Price Elasticity of Supply. - ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Please explain, with the help of a diagram, the price elasticity of supply in the short run for rice.- ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Please explain, with the help of a diagram, the price elasticity of supply in the long run for rare earth metals. ____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Section 1.2e Applications of Elasticity

Application of elasticity to a market: 

What do you think about the connection between the weather in China and the price of apples in Kazakhstan?

In fact, there is a rather close relation, that proves international markets are interrelated.

Some years ago an unusual freeze in China reduced the supply of Chinese oranges (note, that China is the main supplier of citrus fruits in the market of Almaty, cheaper price, good quality, so on).

As a result some consumers would switch from oranges to apples, as well as to other deciduous fruits.

As the demand for apples rises, their prices rise as well (from 60 tenge to 100 tenge).

[pic]

Activity 1.2d Applications of Elasticity

 As we can see from diagram there is an increase of apple prices due to the higher cost of oranges.

The rise in the price of oranges would have effects on all orange related markets, because fresh oranges are the raw materials from which orange juice is made.

1. Why does an increase in the price of oranges raise the price of apples? ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

2. Apples and oranges are:

a. substitutes

b. independent

c. complementary

3. What effects might the rise in the price of oranges have on other markets as well? __________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

4. What happened to the market for orange juice cans and other containers since the price is gone up? ____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Activity 1.2d Applications of Elasticity

5. Explain the effects of a shift in consumer preferences from--for example--visiting movie and theaters to watching movies on their computer. ______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

With the help of a diagram, explain how price elastic of demand basketballs would be in your community. After that explain with the help of a diagram how a 35% increase in the price of basketballs will affect the market for basketball shoes. ____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Task 5

In each of the following say whether the products are normal or inferior goods. Explain your answer.

• Yed = -0.4

• Yed = 2.8

• Yed = -1.3

• Yed = -3.4

• Yed = +0.6

[pic]

Image: Hot Tubs - luxury or necessity? Price elastic or inelastic? Income elastic or inelastic? Normal good or inferior good?

Task 6

In each of the following cases say whether the goods are substitutes or complements and whether the relationship is elastic or inelastic:

• Xed = -2.3

• Xed = -0.6

• Xed = +4.1

• Xed = -1.67

• Xed = + 0.74

Task 7

Look at the following information:

'The authors find that a 1 percent price increase at Amazon reduces sales there by about 0.5 percent, but a 1 percent price increase at Barnes & Noble means a 4 percent sales decline - eight times as large.'

Source: Hal Varian, New York Times

• Calculate the price elasticity of demand for both Amazon and Barnes & Noble.

• What would happen to the total revenue in each case if the businesses concerned decided to drop price by 1%?

• How do you explain the difference in the demand elasticity for the two companies?

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