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Elasticity, substitutes, complements, marginal analysis, normal & inferior goods

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1. What is elasticity of demand? What are the determinants of elasticity of demand, and give an example elasticity of demand for a product or service that you sell or use.
2. Discuss why both supply and demand analysis and marginal analysis must be used in making rational business decisions. Please include specific examples in the posts. Also include the difference between substitutes and complements and the difference between normal goods and inferior goods.

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Solution Summary

This solution explains several concepts, with examples, used in analyzing business decisions. The topics covered are:

Price elasticity of demand
Determinants of elasticity
Substitutes and complements
Normal and inferior goods
Marginal analysis
Pricing strategy.

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>What is elasticity of demand?

Price elasticity of demand is the ratio that relates a change in quantity demanded to a change in price. It is calculated by dividing the percentage change in quantity demanded by the percentage change in price.

>What are the determinants of elasticity of demand?

One determinant is the availability of close substitutes: more choices means higher elasticity. Another determinant is necessity: goods that people need more have lower elasticities. Luxury goods have higher elasticities.

>give an example elasticity of ...

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