A. Elasticity of demand refers to the degree to which the quantity demanded of a good or service changes in response to a change in its price or other determinants of demand. If the percentage change in quantity demanded is greater than the percentage change in price, demand is said to be elastic. If the percentage change in quantity demanded is equal to the percentage change in price, demand is said to be unit elastic. If the percentage change in quantity demanded is less than the percentage change in price, demand is said to be inelastic.
B. Cross price elasticity measures the degree to which the quantity demanded of one good changes in response to a change in the price of another good. If two goods are substitutes, an increase in the price of one will lead to an increase in the demand for the other. Cross price elasticity will be positive in this case. If two goods are complements, an increase in the price of one will lead to a decrease in the demand for the other. Cross price elasticity will be negative in this case.
C. Income elasticity measures the degree to which the quantity demanded of a good changes in response to a change in income. If a good is an inferior good, an increase in income will lead to a decrease in demand for the good. Income elasticity will be negative in this case. If a good is a normal good (sometimes called a superior good), an increase in income will lead to an increase in demand for the good. Income elasticity will be positive in this case.
D. When availability of substitutes exists, demand tends to be relatively elastic because consumers have many options to choose from. For example, if the price of Coke increases, consumers can switch to Pepsi or other soft drinks. The availability of substitutes gives consumers the power to choose and puts pressure on suppliers to keep prices competitive.
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Get Help Now!E. The proportion of income devoted to a good refers to the percentage of a consumer’s income that is spent on a particular good. For example, if a consumer spends 10% of their income on food, a 10% increase in the price of food would represent a 1% decrease in the quantity demanded. However, if a consumer spends only 1% of their income on luxury goods, a 10% increase in the price of luxury goods would represent a larger decrease in the quantity demanded. In this case, the same percentage change in price would have a greater impact on the quantity demanded for luxury goods compared to food.
F. In the short run, a person may have limited options to adjust their consumption of a product in response to a price increase. They may continue to purchase the product at the higher price, but reduce their spending on other goods or services to compensate. In the long run, however, consumers may have more time to find alternatives or adjust their consumption patterns. For example, if the price of gasoline increases, in the short run, consumers may continue to drive the same amount and pay the higher price. In the long run, consumers may purchase more fuel-efficient vehicles, switch to public transportation, or move closer to their place of work to reduce their consumption of gasoline.
G. On the demand curve, demand is elastic at prices above the midpoint (P1), unit elastic at the midpoint (P1), and inelastic at prices below the midpoint (P1). When demand is elastic, a decrease in price will lead to an increase in total revenue, while an increase in price will lead to a decrease in total revenue. When demand is inelastic, an increase in price will lead to an increase in total revenue, while a decrease in price will lead to a decrease in total revenue. When demand is unit elastic, changes in price have no effect on total revenue.
SUBDOMAIN 309.2 – GLOBAL BUSINESS Competency 309.2.4: Cultural Sensitivity
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