Question

Use an elasticity concept to explain each of the following observations.

During economic booms, the number of new personal care businesses, such as gyms and tanning salons, is proportionately greater than the number of other new businesses, such as grocery stores.

Cement is the primary building material in Mexico. After new technology makes cement cheaper to produce, the supply curve for the Mexican cement industry becomes relatively flatter.

Some goods that were once considered luxuries, like a telephone, are now considered virtual necessities. As a result, the demand curve for telephone services has become steeper over time.

Consumers in a less developed country like Guatemala spend proportionately more of their income on equipment for producing things at home, like sewing machines, than consumers in a more developed country like Canada.  

Answer 1

During economic booms, the number of new personal care businesses, such as gyms and tanning salons, is proportionately greater than the number of other new businesses, such as grocery stores.

• During the boom periods, people experience rise in income. Hence, they tend spend on luxurious items relatively larger proportion of income. Thus, demands for these products and services are relatively elastic. Hence, demand for personal care businesses rise during economic booms. While other new businesses such grocery are necessities, demand does not rise during the boom. Demand for necessities is inelastic.

Cement is the primary building material in Mexico. After new technology makes cement cheaper to produce, the supply curve for the Mexican cement industry becomes relatively flatter.

• Use of new technology would reduce the cost of production significantly, hence supply of cement becomes elastic and flatter.

Some goods that were once considered luxuries, like a telephone, are now considered virtual necessities. As a result, the demand curve for telephone services has become steeper over time.

• Telephone has now become necessities, hence now demand is inelastic for luxurious items such as telephone. Rise in price would not cause substantial fall in its demand.

Consumers in a less developed country like Guatemala spend proportionately more of their income on equipment for producing things at home, like sewing machines, than consumers in a more developed country like Canada.

• Small countries have relatively less flexible production system and facilities are relatively costly. Hence, consumers in less developed countries spend proportionately more income on equipment for producing things at home. demand is inelastic for these products. Thus, people are ready to pay for equipments.