Question

Topic: Product Elasticity of Demand

List FIVE products or services: One should be highly elastic One somewhat elastic One unit elastic (approximately) One somewhat inelastic One highly inelastic In each case, Describe why the elastic responsiveness is what it is. What would be the substitutes and/or complements of these products? Why is the cross elasticity of demand positive for substitutes and negative for complements?

Answer 1

Answer

Highly elastic- Gold

They are precious metals which one would buy only when the price is lower and not buy when prices rise.

Substitute- Diamond

Somewhat elastic- Automobiles

In general, automobiles have substitutes and their purchase can be somewhat delayed.

Complement- Petrol, Diesel

Unit elastic- Cellphones with unit elastic demand

A 10% rise in prices would decrease the quantity demanded by 10% of such cellphones.

Substitute- Laptop

Somewhat inelastic- Gasoline

Even if gas prices are high, consumers are still willing to buy it because they still need to drive for work and there are currently very few viable substitutes for gasoline.

Substitute- Petrol

Complement- Automobiles

Highly inelastic- Cancer drugs

These are life saving drugs which have to be purchased no matter what the price is.

Substitutes- None

Complements- Health Drinks

• The cross elasticity of demand for substitute goods is always positive because the demand for one good increases when the price for the substitute good increases.
• Alternatively, the cross elasticity of demand for complementary goods is negative. This is because when the price of the complement good increases, the demand for the other good also falls.