Supply and Demand

Supply and Demand

Task A

Elasticity of demand is a measurement to show the relation between the changes in price of a good with the change in the quantity demanded. This terminology is generally discussed in the context of price sensitivity. A product is said to be inelastic when the quantity demanded is small and is accompanied by the large change in the price. On the other side, a product is said to be elastic in the opposite case. The price elasticity of demand pertains to elastic, inelastic and unit demand as it is an essential variant under the concept of demand. Demand can be categorized into these three elements. Elasticity of demand is an essential concept as it assists the organizations to model a possible change in demand which came into occurrence by changes in the price of goods. This concept also assists a firm to grasp better control on the competitive market behavior. The formula of elasticity of demand well expresses the understanding of this term. If elasticity is equal to one it is called unit elastic, inelastic when less than one, and elastic when greater than one (Bemstein & Griffin, 2006).

“Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price”

Task B

The cross price elasticity is a measure of economics which deals with the responsiveness related to the demand of a product in comparison to the change in price of the complementary products. For example, a car and fuel are complementary products. The change in the prices of fuel may lead to the variation in the consumption of cars. For this purpose, the connection between the substitute prices and complements are mainly focused. In the case of substitutes, consumers tend to buy those products which are lower in prices. On the other side, if the goods are complements the price rise of a good can decrease the demand for both (Ljisen, 2007). Drinks and juices are substitutes in the context of beverages, the increase in the price of drinks will lead to the increase in the demand of juices. Similarly, for the complementary products, the decrease in the demand of DVD players can lead to the expansion of the overall market of DVDs as these are associated products.

Task C

The income elasticity is a concept of economics which reflects the relationship between the changes in the quantity for a good, in relation to the change in the income status. Income elasticity is calculated in the form of a ratio between the changes in demand in comparison to the income level. Normal goods are those in which the demand is increased if the income of the consumer increases. Inferior goods are the ones which are consumed when the income increases and demand decrease (Knell et. al, 2005). For example, silver can be considered as inferior good in comparison to gold, which is a precious element. While on the other hand, some of the goods are consumed in the same quantity no matter how much there ...