Microeconomics-1M

Business Finance

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Elasticity measures how responsive consumers are to various changes. These include changes to the price of the product, to the price of substitute products, and even to changes in their own incomes.

The important elasticity measures that affect consumers are known as: the “price elasticity of demand”, the “cross price elasticity” and the “income elasticity of demand”.

Producers also respond to changes in the economic environment and the degree to which they react is measured as the “price elasticity of supply”.

Understanding the degree to which consumers and producers react gives us insights into what happens to quantity demanded and also to revenues if a business changes the price of its product, or if the price of a related product changes, or if income changes.

  • Name a relatively inexpensive product that you purchase on a regular basis. If the price of that product increased by 25% how would you react? Why? Is your response considered to be ELASTIC or INELASTIC?
  • Now name a relatively expensive product that you purchase less frequently. If the price of that product increased by 25% how would you react? Why? Is your response considered to be ELASTIC or INELASTIC?
  • Let’s consider the price of gasoline. It has been changing a lot over the course of the last few years. How have you responded to these changes? Explain your reaction to the price change in terms of it being either elastic or inelastic.
  • Would you react differently if you believe that increased gas prices will be temporary (short run) as opposed to being a long run phenomenon? How so and why?