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Egt1 Task2

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Supply and Demand The laws of supply and demand will be used to show relationships between supply and demand in given situations. A discussion will be given on elasticity of demand, cross price elasticity, and income elasticity. Followed by an example to discuss why demand tends to be relatively elastic where available substitutes exist. Then the “Proportion of Income Devoted to a Good” concept will be discussed by contrasting two products purchased. It will be addressed how the same percentage change in price affects the percentage change in the quantity demanded. Next, the “Consumer’s Time Horizon” concept will be utilized in contrasting a person’s response to large price increase in the short run and the long run. The graphs will be used to identify price range areas on the demand curve where demand is elastic, inelastic, and unit. Finally, the corresponding impact on total revenue for each of the three price ranges will be explained. Elasticity of demand shows responsiveness of change in price for quantity demanded. Elasticity of demand can be characterized as elastic, unitary or inelastic. Elasticity of demand is said to be elastic when change in quantity demanded do to price change is large. Conversely, when the rate of quantity demanded is small compared to price change it is termed inelastic. Refer to elasticity of demand as unitary when price change and quantity demanded move at an equal rate. The two will move together at a ratio of one. Cross price elasticity refers to how the quantity demanded of one good is affected by a price change of another good. The cross price elasticity value is positive pertaining to substitute goods because when the price of one good increases the demand for its substitute increases. On the other hand the cross price elasticity value is negative pertaining to complementary goods because when the price of a

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Egt1-Task2

...EGT 1 Task 2 A. Define the following three terms: 1. Elasticity of demand The responsiveness or sensitivity of consumers to changes in pricing of products is measured with elasticity of demand. The more reactive consumers are to a price change, the more elastic or simply elastic a product is considered. The less reactive consumers are the less elastic or inelastic the product is (McConnnell,Brue 2011). 2. Cross-price elasticity (include substitutes and complements) The change in demand in one product caused by a price change in another good is called cross price elasticity. The change in the price of one product or goods that causes a change in the demand for another product is measured on the x axis of the demand curve with the cross price elasticity (McConnnell,Brue 2011). Goods can be complimentary; such as a dvd movie (complementary good) that must be viewed with a dvd player (base good) or substitute; such as one brand of soup for another. When goods are complementary that means they work together, so the relationship in their use reflects in the elasticity of price in relation to each other by moving in opposite directions. When goods work in conjunction with each other, cross price elasticity is negative- meaning an increase in the price of one product causes the demand for the other to decrease and a decrease in the price of one causes demand for the other to increase. For example if the price of dvd players decreases the demand increases and the price...

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