Question

The microeconomic concept of elasticity is useful to the business managers as well as government managers. Using relevant examples from an economy or business that you are familiar with, discuss the following:

a. Importance of elasticity of demand of a specific good to the government.

b. Importance of Price Elasticity of Demand (PED) to the producer of the good.

c. Importance of Income Elasticity of Demand (YED) to the business managers.

d. Importance of Cross Elasticity of Demand to the business.

e. As a business manager, discuss the critical factors that directly influence the price elasticity of demand of a given commodity that you are familiar with.

Answer 1

Answer: a) elasticity of demand of a specific good is very important for government . if government wants to higher tax on a commodity than first it need to find out the elasticity of demand for that commodity . if elasticity of demand for that commodity is less than only government can set a higher tax , because less elastic demand means people have less substitute available so if tax is higher than people will purchase it because in that case they don't have much option and as a result they have to buy it .

Answer : b) price elasticity of demand can be measure as ratio of percentage change in the quantity demanded to percentage change in price . elastic demand means if there is increase in price than quantity change will be more responsive , and if it is less elastic means if there is change in price and quantity change is less responsive. suppose for a commodity price elasticity of demand is that is e 1 and for another commodity e 1 , so in this case producer will charge more price to the less elastic commodity and less price to more elastic commodity . In that case foe setting price of a commodity price elasticity of demand play a major role .

Answer : c) income elasticity of demand is the ratio of percentage change in quantity demanded to percentage change in income . As income increases than people spend more on luxury good , and in the case of necessary good income elasticity of demand is less than one that is if income increases than people prefer to buy less amount of it . And in the case of inferior good if income increases than demand for inferior good decreases and vice versa . Here business manager should take into consideration different types of goods and the income elasticity related to it . it will help them to manage better if they know different types of goods and the income elasticity related to it.

Answer d ): cross elasticity of demand can be define as ratio of percentage change in demand for good A to percentage change in the price of good B. suppose there are two goods . good A ( tea ) and good B ( coffee) . if there in increment in the price of coffee than demand for tea will increase and vice versa . That is if commodity can be substitute than if price of one commodity changes than quantity demanded for another commodity will change . so it need to consider the price of commodities  in a business and quantity demanded changes related to it . As substitute good affect each other that is price of one good related to quantity of another than in a business it will help to choose price wisely .

Answer e) : there are many factors that affect price elasticity of demand , that is income , whether the commodity is luxury one or whether it is necesity good . Timeframe , substitute and narrowness of market is also the factors that influence pice elasticity of demand. suppose there are many substitute avialable than if price icreases for a particular commodity than people will go to substitute available that is price elasticity is more , if less substitute is available than if price increases for a particular commodity than people will have less option to substitute so here elasticity is less . Timeframe is also a major factor suppose it is raining than you could probably increase the price of umbrellas , in a short time frame things tends to be less price elastic but in long timeframe there will be more substitute avaialable so things tends to   be more price elastic .lower the share of income the less elastic , if there is high share of income than there will be more elastic . luxury good have high elasticity and necessity good is less elastic .

in narrow market there will be more substitute available and elsticity is more , the broader the market the less substitute you will get that is elasticity is less.