Question

part 1

Choose any five products that exist within an economic market then classify and describe their ‘elasticity’ (relatively inelastic, relatively elastic, perfectly elastic, perfectly inelastic, unitary elastic).

Perfectly Inelastic Perfectly Elastic Relatively Elastic Price Elasticity of Demand Unitary Elastic Relatively Inelastic

In each case, please explain what would occur if:

income increased

loss of job

a substitute was introduced

there was a sudden shortage of the product

Part 2:

Examples of Elasticity

In your own words, please define, describe, and use an example for each of the following terms using a minimum of 50 words each.

Unitary Elastic

Perfect Inelasticity

Income Elasticity of Demand

Cross Elasticity of Demand

Answer 1

PART 1

Five products that exists within the economic market are :

1) Luxury good like sports car - This type of product have perfectly elastic demand or very high elastic demand. - If income increased quantity demanded will increase. - Loss of job will lead to fall in quantity demanded - a substitute introduced will lead to fall in quantity demanded - shortage of product will have no effect on price level or quantity demanded

2) Gasoline - This type of product have perfectly inelastic demand or very high inelastic demand   - If income increased there will be no change - Loss of job will lead to no change    - a substitute introduced will lead to fall in quantity demanded - shortage of product will lead to increase in price level

3) Air travel for vacationers - This type of product have relative elastic demand - If income increased there will be increase in quantity demanded - Loss of job will lead to fall in quantity demanded    - a substitute introduced will lead to fall in quantity demanded - shortage of product will lead to increase in price level

4) Petrol - This type of product have relative inelastic demand   - If income increased there will be no change    - Loss of job will lead to no change     - a substitute introduced will lead to fall in quantity demanded - shortage of product will lead to increase in price level

5) Digital camera - This type of product have unitary elastic demand      - If income increased there will be no change    - Loss of job will lead to no change     - a substitute introduced will lead to fall in quantity demanded - shortage of product will lead to increase in price level   

PART 2

Unitary Elastic Demand:

When the proportionate change in demand produces the same change in the price of the product, the demand is referred as unitary elastic demand. The numerical value for unitary elastic demand is equal to one (ep=1). For example: digital cameras

Perfectly Inelastic Demand:

A perfectly inelastic demand is one when there is no change produced in the demand of a product with change in its price. The numerical value for perfectly inelastic demand is zero (ep=0). For example : Life saving drugs, gasoline

Income elasticity of demand:

It measures the responsiveness of the quantity demanded for a good or service to a change in income. It is calculated as the ratio of the percentage change in quantity demanded to the percentage change in income. For example, if in response to a 10% increase in income, the quantity demanded for a good increased by 20%, the income elasticity of demand would be 20%/10% = 2.0.

Cross-price elasticity of demand:

It measures the responsiveness of the quantity demanded for a good to a change in the price of another good, ceteris paribus. It is measured as the percentage change in quantity demanded for the first good that occurs in response to a percentage change in price of the second good. For example, if, in response to a 10% increase in the price of fuel, the demand for new cars that are fuel inefficient decreased by 20%, the cross elasticity of demand would be: - 20% / 10% = -2 . An increase in the price of fuel will decrease demand for cars that are not fuel efficient.