ECO 204 Wk 2 Dis 1

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204

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Economics

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Feb 20, 2024

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Identify the determinants of the price elasticity of demand. Explain each one. Substitutability- The quantity demanded of an item like table salt is not overly sensitive to price changes over a wide range of prices, but the price elasticity of demand will rise in proportion to the availability of more substitutes (Amacher, & Pate, 2019). Time- As customers have more time to make changes, demand becomes more elastic because there are more options available (Amacher, & Pate, 2019). Total Revenue- The relationship between total revenue and the price elasticity of demand is used to explain how businesses determine and change their pricing. Total revenue (TR) is calculated by multiplying quantity, or the number of sold goods, by the item's price (Amacher, & Pate, 2019). Determine whether each of the following items is elastic or inelastic: bottled water, gourmet coffee, Apple cell phones, and gasoline. Explain your reasoning. Bottled water (Elastic)- This is somewhat of a luxury good, which has several substitutes. However, there is ample tap water available. Gourmet coffee (Elastic)- Given the increase in the cost of gourmet coffee, there are many alternatives available. Apple cell phones (Inelastic)- This brand of cell phone is considered a luxury good. If prices increased there are other options available. Gasoline (Inelastic) - Because gasoline serves many functions and has many uses, its demand is constant. Gasoline is used in cars, stoves, lawnmowers, and no matter the cost people will purchase it because there are no substitutes. Distinguish between a necessity and a luxury. A luxury is something we do not require but gives us pleasure and satisfaction. Anything we require for our daily life, such as food, water, and shelter, is a necessity. How are the price elasticity of demand and total revenue related? Why is the price elasticity of demand important to pricing? Price and total revenue have a positive relationship when demand is inelastic (low price elasticity), meaning that as prices rise, total revenue rises as well, whereas price and total revenue have a negative relationship when demand is elastic (high price elasticity), meaning that price increases cause lower total revenue. Reference: Amacher, R., & Pate, J. (2019). Principles of microeconomics (2nd ed.). Bridgepoint Education.

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