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ECON IP2 - Essay Example

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Specifically, it is the percentage change in quantity demanded caused by a percentage change in price. Therefore, it is computed according to the following rule:
In the…
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Download file to see previous pages... The demand for cigarettes are also not as elastic as the demand for laptops since smokers tend to be addicted and therefore the amount of cigarettes they purchase are not as responsive to prices as laptops are. Finally, among the products considered the per unit price of laptops tend to be highest and hence the opportunity cost of the expenditure is highest in case of laptops as well. Therefore, the demand for laptops tends to be substantially more elastic.
The importance of elasticity for business primarily is because of its significance in pricing strategies. Price hikes or price cuts do not affect the revenues for goods whose demands are inelastic. Therefore, it is not advisable to reduce prices to try and induce customers into buying products which have inelastic demands. On the other hand customers tend to respond highly to price cuts in case of products that have high price elasticity. Since maximizing revenues is one of the primary targets for businesses, and how price changes affect revenues are dependent upon price elasticity of demand, it is very important for businesses to know the type of demand its product has.
An increase in national income would not affect the price elasticity of demand. Although it may lead to rise in overall demands, it will have no impact on the responsiveness of demand to changes in price.
Elasticity of supply is simply the responsiveness of quantity supplied to price changes. It is the percentage change in quantity supplied caused by a percentage change in price. The factors that influence the elasticity of supply are:
a) Time - since it is not feasible to expand production immediately in response to a price change, although in the long run such expansion is possible, supply tends to be relatively inelastic over the short run and more elastic over the longer run.
b) Duration of production – typically goods that take longer to produce, such as agricultural output (longer production cycles) tend to have ...Download file to see next pagesRead More
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