The price elasticity of demand has been identified for nine markets: Salt: 0.1; Gasoline, short-run: 0.2;...

The price elasticity of demand has been identified for nine markets: Salt: 0.1; Gasoline, short-run: 0.2; Gasoline, long-run: 0.7; Automobiles, long-run: 0.2; Chevrolet automobiles: 4; Coffee: 0.25; Restaurant meals: 2.3; Airline travel, short-run: 0.1; Airline travel, long-run: 2.4.

Which of the goods listed would be considered price elastic? Price inelastic? What do the goods that are price inelastic have in common? Why is the price elasticity of demand for automobiles 0.2, but the price elasticity of demand for Chevrolet automobiles is 4.0? Why is the long-run elasticity of demand for gasoline different from the short-run elasticity of demand?

Solutions

Expert Solution

a) When the absolute value of price elasticity of demand is greater than 1, it is considered to be elastic. So, Chevrolet automobiles (4); Restaurant meals (2.3); and Airline travel, long-run (2.4) have elastic demand.

b) When the absolute value of price elasticity of demand is less than 1, it is considered to be inelastic. So, Salt: 0.1; Gasoline, short-run: 0.2; Gasoline, long-run: 0.7; Automobiles, long-run: 0.2; Coffee: 0.25; and Airline travel, short-run: 0.1 have inelastic demand.

c) The demand for inelastic goods responds less to price changes. Also, they tend to be necessary goods. In addition, goods having inelastic demand tend to be broader category goods (like automobiles) rather than narrow category goods (like Chevrolet automobiles)

d) The broader the category of the good, the more inelastic the demand is and the narrower the category of the good, the more elastic is the demand. 'Automobile' is a much broader category than 'Chevrolet automobiles'. Therefore, the price elasticity of demand for 'Chevrolet automobiles' is much higher than the price elasticity of demand for 'automobiles'

e) Demand for the same good tends to be more elastic in the long-run than in the short-run. This is because people need time to adjust their demand and find suitable alternatives. People cannot respond much to the changes in the price of gasoline in the short-run. However, they can adjust their demand in the long-run by changing consumption pattern, lifestyle or finding other substitutes. This is why the long-run elasticity of demand for gasoline different from the short-run elasticity of demand

Rahul Sunny answered 1 year ago

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