Is demand in your automobile sector elastic or inelastic? Explain in your own words what the...

Is demand in your automobile sector elastic or inelastic? Explain in your own words what the price elasticity for Toyota means and use the principles of price sensitivity to support your choice.

Expert Solution

Price elasticity of demand refers to the responsiveness of quantity demanded to price. Its the percentage change in quantity demanded divided by the percentage change in price.

Demand in automobile sector is elastic. For example, lets look at the price elasticity of demand for Toyota cars. Price elasticity of demand for Toyota denotes how much Quantity demanded of Toyota will change as a result of the change in price of Toyota.

We have already stated that Toyota has an elastic demand. Demand is elastic if change in quantity demanded is greater than the change in price .

Significant reserach was done by McDonald and Bordey in this field. They estimated that, the average elasticity of demand for Toyota was 1 .8 . This means that, demand for Toyota is price sensitive.When price of Toyota changes by a certain percentage, there will be a more than percentage change in the quantity demanded of Toyota. Elasticity is greaterd to a number of factors . For example, the existence of substitute brands like Ford and Lexus.We already know that, higher the number of substitutes, higher the price elasticity of Similarly high proportion of income is spent on a car. Higher the proportion of income spent, higher the price elasticity.

This can be further explained with the help of the following diagram.

In the diagram, price is measured on the Y axis and quantity demanded is measured on the Y axis.When price increases from P1 to P2 , quantity demanded declines from Q1 to Q2. However, decline in quantity due the price is higher than the Increase in price.

Rahul Sunny answered 9 months ago

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