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Elastic and Inelastic Prices - Coursework Example

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The researcher of this work "Elastic and Inelastic Prices" aims to analyze why do necessities tend to have demand that is price inelastic, while luxuriestend to have demand that is price elastic. Reportedly, when demand is elastic, an increase in price will result is a decrease in sales…
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Elastic and Inelastic Prices
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Download file to see previous pages These are so basic to life that irrespective of the price increase, people will buy them.
Those goods that are regarded as necessities tend to have lower price elasticity, whereas demand for luxury goods is more price elastic. As consumers’ incomes go up the classification of certain goods may change. A good that is considered a luxury at lower income levels may be considered a necessity at higher income levels.
Answer: Price ceilings are government restrictions on prices. Usually, these ceilings stipulate the legal maximum price a producer can charge for a particular good or service. Governments impose such controls normally to stop a rapid rise in the cost of a good or service during a shortage, in an attempt to benefit a favored constituency or to hold down a general increase in inflation. Usually, ceilings are applied to specific goods and services such as on oil during the Arab oil embargo of 1973-1974. But selective price controls usually end up harming the very constituency the government is trying to help. For example, rent ceilings destroy incentives to build and maintain low-income housing, resulting in less housing for the poor—the very ones who were supposed to benefit from the controls. The governments of some Third World countries impose price ceilings on farmers to win favor among the urban population by providing them cheap food. Ironically, the effect of such a policy is to reduce farm income and drive farmers off the land and into poverty in the cities—where at least they can get cheap food! Of course, fewer farmers means less food and thus increasing discontent among the now growing urban population.
Answer: Opportunity cost is the cost incurred (sacrifice) by choosing one option over the next best alternative. Thus, the opportunity cost is the cost of pursuing one choice instead of another.  ...Download file to see next pagesRead More
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