Question

The following information describes the requirements for your response: It must be at least three paragraphs long (more is usually better), grammatically correct, and demonstrate that you understand and can apply the concepts covered in the second competency module. When writing your response, follow the steps listed below in the order that they appear.

Step One: Begin by describing the process for calculating price elasticity of demand. Then, using fictitious numbers, calculate the price elasticity of demand for donuts at different prices. Remember that you are using your own prices and quantity demanded at each price.

Step Two: Next, identify a product that has a perfectly elastic price elasticity of demand (changes in price cause demand to fall to zero) and explain why, and then identify a product that has perfectly inelastic price elasticity of demand (price changes don’t affect demand) and explain why.

Step Three: Next, describe the factors that influence the price elasticity of demand for a product. Once you have done this, classify each of the following products as elastic, inelastic, or unitary elastic and explain why.

a) Athletic shoes.

b) Medicine for Diabetes.

c) Fast food.

d) College education at Harvard.

e) Pens

f) Houses in McAllen

Answer 1

Step 1 : The price elasticity of demand changes shows the responsiveness of quantity demanded of the product to the changes in price level. Price elasticity of demand = Percentage change in quantity demanded / Percentage change in price

Step 2: Perffeclty inelastic demand can be seen in case of life saving drug and perfeclty elastic demand can be seen in case of luxury goods.

Step 3:

The price elasticity of demand depends on percentage of income spent on the good, availability of substitutes of good, time period , nature of the good etc.

a.  Athletic shoes have a relatively inelastic demand because they are necessity for persons who are into athletics. Thus, the demand becomes inelastic.

b. Medicine for Diabetes. This is also a necessity commodity for those suffering from diabetes and thus demand of the good is relatively inelastic.

c.  Fast food. - The demand of fast food is elastic.

d. College education at Harward - Since students want to attain education from the best institute, this makes the demand inelastic.

e.Pens - The demand is inelastic because it is a necessity commodity.

f. Houses in Mc ALlen - Elastic because only few people can afford to have houses in the place.