In this discussion, give an example of two goods: one that you think would likely have...

In this discussion, give an example of two goods: one that you think would likely have an inelastic price elasticity and one that would have an elastic price elasticity. Then, justify your answers by explaining how each of the determinants of elasticity applies to that good. As a reminder, those determinants are:

Availability of close substitute
Time horizon
How broadly the good is defined (ex: market for food vs. the market for hot chicken)
Viewed as necessity vs. luxury
Share of the budget

Expert Solution

Inelastic price elasticity of a good is when the price of a good changes , but the quantity is less responsive to such a change. Eg: Salt. Salt is one such example of a good with inelastic price elasticity. This is because there are no close substitutes of the good and this makes it inelastic in nature.

the second determinant is time horizon: even in the long run, it would be a bit difficult to find substitutes of salt.

The good is defined in the market for food and is an essential commodity and hence has a demand as inelastic. It is a necessary good and hence cannot be avoided ie nor it could be over consumed nor under consumed.

Share of budget: It constitutes a small amount of budget because it is consumed in smaller quantities in the food and also cannot be over consumed.

The commodity with a elastic price elasticity is a brand of Car. There are many brands of cars and unless a person is inclined towards a single car brand , he should not be bothered about the availability of substitutes because there are many of them available in the market. The time horizon : since it has many substitutes in form of different brand in the short run itself , there is elastic demand.

Car is a luxury commodity when it is being compared to other essential commodities. This is why it is a luxury good for most consumers. hence it has a elastic demand . Also the fact that a car has a higher price and consumes a good proportion of income, it is ought to have elastic demand.

Rahul Sunny answered 1 year ago

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