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Elasticity Concept - Specific examples

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Use an elasticity concept to explain each of the following
observations.
a. During economic boom times, the number of new personal
care businesses, such as gyms and tanning salons, is proportionately greater than the number of other new business such as grocery stores.

b.Cement is the primary building material in Mexico. After new technology makes cement cheaper to produce, the supply curve for the Mexican cement industry becomes relatively flatter.

c. Some goods that were once considered luxuries, like a telephone, a new considered virtual necessity. As a result the demand curve for telephone service has become steeper over time.

d. Consumers in a less developed country like Guatemala, spends proportionately more of their income on equipment for producing things at home like sewing machines, than consumers in a more developed country like Canada.

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Solution Preview

Elasticity is the extent to which a demand or supply curve reacts to a change in price or quantity. Variations in elasticity are the result of the necessity of the good or service. For instance, heart medicine is a good that is essential and, therefore, the price can fluctuate a great deal and the demand will remain the same. In fact, until the price reaches the point that it is simply not affordable, the demand will likely remain the same. Alternately, a good or service that is not as essential, say spa treatments, will have greater elasticity in the pricing. Meaning as the price of the service increase, the demand will fall because some people will simply not be willing to pay the increased price for the service. The elasticity of supply is similar, except that rather then changes in price and demand, the elasticity of supply is related to changes in quantity supplied. Keeping this explanation in mind helps in the understanding of the problems listed.

a) During economic boom times, people generally have more discretionary income. Because of increased employment coupled with ...

Solution Summary

How the elasticity concept is relevant in specific situations, like personal care businesses, cement industry, cell phones, less developed countries.

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Similar Posting

Elasticity of Demand and Consumer Responsiveness

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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