What do you understand by the own-price elasticity of demand for a good? 1. (a) What do you understand by the own-price elasticity of demand for a good? (b) Will a linear (straight line) demand curve have a constant own-price elasticity of demand? Explain your answer. (c) Following the terrorists attacks in the USA on 11 September, there was a marked fall in business travel. In respomse, many hotels cut their prices to business travellers; for example the Hyatt Hotel group offered discounts of up to 50 per cent off regular room rates. Under what circumstances would this lead to increased revenue for these hotels? Before we define the meaning of the own-price elasticity for a good we must understand elasticity and its concept in general. Elasticity is basically a comparison between the sizes of change in the quantity demanded, in the case of the own-price elasticity, of a certain good and in the variable that caused this change. According to Mankiwelasticity is a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants. The law of demand implies that an increase in a price of a good will subsequently lead to a fall in the quantity demanded for that good. The formulae which calculates this amount is the division of the percentage of change in quantity demanded by the percentage of change in price. The sign of price elasticity of demand, and elasticity as well, is always going to be negative due to the fact that quantity and price demanded are usually in opposite directions. Elasticity is going to be negative as well since neither the percentage change in price nor the the percentage change in quantity ar... ... middle of paper ... ...sequent repurcusion this had in economy as a whole brought a downfall in business travelling. The hotels in order to manage this crisis effectively reduced their prices and offered discounts in order to increase the quantity of customers visiting them. If we consider the law of demand in this case, hotel reservations should increase in this period as well as the total revenue of the business but this would happen when the price elasticity of demand is elastic. This happens when the percentage change in quantity is larger than the percentage change in price. Concluding, we would easily say that it is assume that the hotels would increase their total revenue with discounts and better prices but this is not always the case. There are other factors influencing customer behaviour after these terrorist attacks that would not be easily predicted or affluenced.
this notion of stable supply and demand affected prices of farm commodities. “Low prices on
price can drop by ten per cent this year people might expect it to drop
Now referring to Blue Bell Company, the shift in supply occurs when they decide to recall all their products and re-evaluate it. Blue bell will more than likely increase the price of the remaining items in the market. This is the result of consumers still providing a high amount of demand for ice cream even though there is less to supply. This theory can be accurately applied to this situation because there is no other solution that they can do to combat the consumers’ need of ice cream. For example, if they do continue to sell at the same price, soon they will not be able to produce as much as consumers want thus eliminating the good from the market.
He contends that the law of demand is the most famous in economics and is also the truest law for many economists. One of the reasons for this belief is that elasticities allow economists to quantify differences among markets without standardizing the units of measurement (Aycock, 2010). The law of demand explains that, other things equal, when the price of a good rises, the quantity demanded will fall and when the price of a good falls, the quantity demanded will rise. In terms of elasticity, the price elasticity of demand (PED) measures how sensitive consumers are to a change in price (McConnell et al., 2015, p.134). Prices are elastic when a change in price causes a larger percentage change in quantity demanded. For example, if the price of a Snickers bar falls 20% but demand increases by 80%, PED = -4.0. This change in price may prompt consumers to buy alternative candy bars. Inelastic price changes causes a smaller percentage change in quantity demanded. If the price of tobacco falls 30% but demand only increases by 10%, PED = -0.33. Since it is so addictive and does not have a substitute, if the price of cigarettes increases people who smoke will likely continue to do so (Pettinger,
Economic events are largely governed by the interaction of supply and demand. The law of supply states that with ‘all else being equal’ (ceteris paribus), as market price of a good or service increases/decreases so will an increase/decrease in quantity supplied. In turn, the law of demand states as market price of a good or service increases/decreases ceteris paribus, the quantity demanded will increase/decrease accordingly. The Australian avocado industry is an indicative example of microeconomics - the study of individual consumer or business decision making and spending behaviour in relation to the allocation of a limited resource and the correlation of supply and demand in determining
All consumers should aware themselves of the factors involved with price elasticity and how the traits potentially impact their purchases and personal or commercial budgets. Commercial firms have the problem of managing price elasticity with their products and prices and governments have a constant problem of determining taxes from price elasticity. I used three examples to attempt solving how firms manage their products with price elasticity factoring with Proctor & Gamble, the oil, and airline industries. I used government examples of how the attempts to collect data to formulate their policies for taxation on elastic and inelastic products while also describing how the US Postal Service uses price elasticity to compete with corporate competition. Exposure to these factors of price elasticity will generate consumers’ awareness of firms and governments role to determine goods or services at a particular price.
Lowering the asking price could increase demand because it would open up a consumer market that, previously, couldn’t
In the graph, it shows the law of demand; as the price increase there is a decrease in the quan...
below, if firm X decides to lower its price from B to D, sales should
In the short run, other things being equal, an increase in demand will raise the price and this, in turn, will cause an extension in supply.
... Also important is the price of complements, or goods that are used together. When the price of gasoline rises, the demand for cars falls.
...n the companies will have to decrease the price otherwise the product will not be sold at higher prices and the revenue would not be as large as companies would like to.
Distinguish clearly between the Income and the Substitution Effects of a change in the Price of a Good. Under what Conditions will the Income Effect and the Substitution Effect act in Opposite Directions?
...ises. Therefore, In the case of competing with another student on the market of ice-cream, it is clear that the price of ice-cream on our campus will falls from 1.50 to the new price and the quantity of ice-cream available will rises while the level of demand will stay unchanged.
opposite is true if consumers decide that they want less of a good. Price will continue falling until the surplus had been eliminated. The same analysis can be applied to factor markets. If the demand for a particular type of labour exceeded its supply, the resulting shortage would drive up the wage rate, thus reducing firm's demand for that type of labour and encouraging more workers to take up that type of job. Wages would continue rising until demand equalled supply or until the shortage was eliminated. The result of this is that, in theory, the allocation of all resources happens without the