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Discussion of Elasticity

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Scenario: Suppose that the current market price of VCR's is $300, that the average consumer disposable income is $30,000, and that the price of DVDs (a substitute for VCR's) is $500. Under these conditions annual U.S. demand for VCR's is 5 million per year. Statistical studies have shown that for VCR's the own-price elasticity of demand is -1.3. The income elasticity of demand for VCR's is 1.7. The cross-price elasticity of demand for VCR's with respect to DVDs is 0.8. Use this information to predict the annual number of VCR's sold under the following conditions:

(a) Increasing competition from Korea causes VCR prices to fall to $270 with income and the price of DVDs is unchanged.

(b) Income tax reductions raise average disposable personal income to $31,500 with prices unchanged.

(c) Technical improvements in DVD players causes the price of a DVD to fall to $400, with the price of VCRs and income unchanged.

(d) All of the events described in parts 1-3 occur simultaneously.

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a) Own price elasticity = -1.3
Change in price = (270-300)/300=-10%
Change in quantity demanded = Own price elasticity * Change in price = -1.3*-10%=13% (demand will increase by 13%)
New demand level = 5 million ...

Solution Summary

In about 140 words, this solution computes various different forms of elasticity which each relate to a specific situation on the subject of VCR's. All calculations and formulas are included in this response.

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See Also This Related BrainMass Solution

Discussion on Supply and Demand & the Concept of Elasticity

1. Mr. Capon is a butcher who recently raised the price of steak at his market from $1:50 a pound to $2:00 a pound. Correspondingly his sales dropped from 200 pounds per day to 100 pounds per day. Is the demand for steak at Capon's market elastic or inelastic? Explain. (show all works please) Given this circumstance, advise Mr. Capon on a pricing strategy to sell more or less.

2. Using average values find the coefficient of elasticity for the following:
Price..............Quantity
$45.................65,000
$55.................35,000

Explain your coefficient of elasticity.

3. The following relations describe the supply and demand for body lotions
Qd = 65,000 - 10,000 P
Qs = -35,000 + 15,000 P

Where Q is the quantity and P is the price of a body lotion, in dollars.
a. Find Qs, Qd, and shortage or surplus at prices; $6, $5, $4, $3, $2, and $1
b. What is the equilibrium price?
c. Using the law of Supply and Demand, comment on your market observation.

4. What is comparative static analysis? Given equilibrium of price and quantity, explain the impact of simultaneous shifts in demand and supply.

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