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# Elasticity of Demand and Consumer Responsiveness

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Introduction:

Economists use elasticity to measure consumer responsiveness to changes in the various determinants associated with demand. Elasticity addresses percentage changes i.e. a percentage change in quantity demanded divided by a percentage change in (own price, the price of another good, or income). Understanding elasticity is important to businesses and policy makers alike as they consider how a potential change will impact markets when consumers adjust their purchasing behaviors.

Task:

A. Discuss elasticity of demand as it pertains to elastic, unit, and inelastic demand.

B. Discuss cross price elasticity as it pertains to substitute goods and complementary goods.

C. Discuss income elasticity as it pertains to inferior goods and to normal goods (sometimes also called superior goods).

E. Discuss the "Proportion of Income Devoted to a Good" concept by contrasting two products typically purchased each month.

1. Address, in your discussion, specific examples of how the same percentage change in the price of both goods affects the percentage change in the quantity demanded for each of the two goods.

F. Contrast how a person would initially respond to a relatively large increase in the price of a product in the short run as opposed to how that same person might react to that same price increase over a longer time horizon (i.e., the long run), using the "Consumer's Time Horizon" concept.

G. Identify by price range the areas on the demand curve where demand is elastic, inelastic, and unit elastic using the attached "Graphs for Elasticity of Demand, Total Revenue."

1. Explain the corresponding impact on total revenue for each of the three price ranges identified in part G.

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#### Solution Preview

Hello;

It is my pleasure to provide you with some notes related to your latest economic assignment. I will provide so broad notes for each item that should assist you in answering the questions provide.

A. Discuss elasticity of demand as it pertains to elastic, unit, and inelastic demand

Let's begin with unit elasticity. Simply put, unit elasticity is measured as the percentage change in the quantity demanded of a product when equalized to the percentage change in price. So, if the elasticity is equal to one (1), you can say that the product is demonstrating unit elasticity. Elastic, on the other hand, is a situation where the unit responds to a lot of small changes in the market, based on certain parameters. It is measured as the ratio of the percentage change in one variable to the percentage change in another variable. There are different ways of expressing elasticity. You can say that a good is relatively elastic of the elasticity is greater than one. If, however, the elasticity is equal to infinity, you would say that perfectly elasticity has been achieved. Inelasticity, however, is the term used to represent the situation when elasticity is either equal to 0 (perfectly inelastic), or when elasticity is between zero and one (relatively inelastic).

B. Discuss cross price elasticity as it pertains to substitute goods and complementary goods

When we talk about the cross price elasticity of a good, we are really aiming to measure the responsiveness of demand for one good when a change occurs to the price of a different, but related good. In essence, we are looking to determine the effect that changes in relative prices within a market have on the demand pattern that can be observed. In determining this, you do need to make a distinction between certain substitute and complementary products. An ...

#### Solution Summary

The elasticity of demand and consumer responsiveness are examined. The cross price elasticity as it pertains to inferior goods and to normal goods are given.

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