EGT1 - Task 2 Essay Example
EGT1 – Economics and Global Business Applications
Task 2
Elasticity of demand is a measure of responsiveness to a price change of a good or service. When demand is elastic, the percentage of a price change of a product will result in a larger percentage of quantity demanded (McConnell, p 77). It basically means reducing the price of a good service will result in a greater quantity demanded and an increase in revenue for the seller. When demand is inelastic, a change in price will result in a reduction of quantity demanded, which will then lead to a revenue decrease (McConnell, p 77). To demonstrate elastic and inelastic demand results, Company A sells 100 pens at $1.00 a piece each day, making their revenue $100.00. Company A then decides to sell their pens at $.50, which results in a total of 250 pens being sold. The total revenue from the price drop is $125, resulting in an additional $25.00; therefore the demand in this scenario is elastic. If selling the pens at the decreased price of $.50 would result in more pens being sold, but less total revenue, the demand is said to inelastic. According to McConnell, when demand in unit elastic, the percentage change in price and the resulting percentage changes in demand are the same. The change in price will not increase or decrease revenue.
Cross price elasticity measures the response of demand to a change in price of another substitute or complimentary good (McConnell, p. 87). Substitute goods are goods that can be purchased in place of another good. Examples of substitute goods are soda (buying Coke vs. Pepsi), computers, and potato chips. A positive cross elasticity of demand means the increase of price in one good, for example Coca-Cola, will increase the demand of a substitute good, for example Pepsi. As the price for Coke increases, consumers are more likely to purchase Pepsi at a lower price, thereby increasing its demand. Complementary goods are items that are typically purchased in
Task 2
Elasticity of demand is a measure of responsiveness to a price change of a good or service. When demand is elastic, the percentage of a price change of a product will result in a larger percentage of quantity demanded (McConnell, p 77). It basically means reducing the price of a good service will result in a greater quantity demanded and an increase in revenue for the seller. When demand is inelastic, a change in price will result in a reduction of quantity demanded, which will then lead to a revenue decrease (McConnell, p 77). To demonstrate elastic and inelastic demand results, Company A sells 100 pens at $1.00 a piece each day, making their revenue $100.00. Company A then decides to sell their pens at $.50, which results in a total of 250 pens being sold. The total revenue from the price drop is $125, resulting in an additional $25.00; therefore the demand in this scenario is elastic. If selling the pens at the decreased price of $.50 would result in more pens being sold, but less total revenue, the demand is said to inelastic. According to McConnell, when demand in unit elastic, the percentage change in price and the resulting percentage changes in demand are the same. The change in price will not increase or decrease revenue.
Cross price elasticity measures the response of demand to a change in price of another substitute or complimentary good (McConnell, p. 87). Substitute goods are goods that can be purchased in place of another good. Examples of substitute goods are soda (buying Coke vs. Pepsi), computers, and potato chips. A positive cross elasticity of demand means the increase of price in one good, for example Coca-Cola, will increase the demand of a substitute good, for example Pepsi. As the price for Coke increases, consumers are more likely to purchase Pepsi at a lower price, thereby increasing its demand. Complementary goods are items that are typically purchased in