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INTRODUCTION TO MANAGERIAL ECONOMICS Case Solution & Answer

INTRODUCTION TO MANAGERIAL ECONOMICS Case Solution

QUESTION # O1

Price

It is the change in the quantity demand or to buy a product relative to its price change. Mathematically it can be expressed as:

Price Elasticity of Demand = Percent Change in Quantity Demanded/ Percent Change in Price

It is used to know the effects on price by the change of supply or demand. Supply and demand are not much affected by the change in the prices of inelastic goods. (KENTON, 2020).

1.Elastic Goods

If the quantity of demand is changed by the change in the price of good, we can consider it as an elastic good.

Example:

People will stop purchasing a product of any particular brand’s price rises, for example: cereals’ price.

2.Inelastic Goods

If the quantity of demand doesn’t get affected by the change in the price of the good; we can consider it as an inelastic good.

Example:

People want to buy gasoline and if its prices rises, everyone would want to purchase the same amount of the oil that they need.

Cross-Price Elasticity of Demand

It measures the reaction in the demand of one good when the prices of another good change. It is calculated by taking the % change in the demand of one good and then dividing it by the change in the price of another good. (HAYES, 2020).

Cross-price elasticity of the substitute goods’ demand remains positive because if the price of one good increases then the demand of the substitute good also increases. And for the complementary goods; the cross-price elasticity of demand is always negative. Just like if the price of coffee increases then its demand will definitely decrease, so then the coffee maker would want fewer amount of coffee stir strips.Mathematically it can be find as,

Elasticity = Percentage change in quantity of good 1/Percentage change in the price of good 2

There are also weak substitutes existing in the market that have lower cross elasticity of demand. Just like: tea versus coffee. And, the products that have higher cross elasticity of demand are the strong substitutes of each other. Just like brands of tea, if the prices of one brand rises then the demand of another company’s tea would also change.

Income Elasticity of Demand

It denotes the sensitivity in the quantity demanded of a certain good by the change in the income of the consumers who purchase this good while keeping all other factors constants.It can be calculated by taking % change in the quantity demanded, dividing it by the % change in the income of the consumers. Businesses measure it to forecast the impact of the business cycle over the goods’ sales. (KENTON, Income Elasticity of Demand, 2020).

Mathematically

Elasticity = Percentage change in the quantity demanded / Percentage change in income

Distinguish between the Three Elasticity’s

Price Elasticity Cross Elasticity Income Elasticity
It measures the change in the quantity demanded against the price of the goods. It measures the change in the demand of the product if the  prices of its complementary or substitute change. It measures the change in the quantity demanded by the change in the consumer’s income.
Relation between the price and demand is negative For substitute goods, its value remains positive. And for complementary goods it is always negative. If income increases then the demand of the products also increases, and positive relation exists.
Products can be categorized as: Elastic, Inelastic, Unitary-elastic Products can be categorized as: Complementary and substitute products Goods can be categorized as: Inferior, Luxurious and Normal.

Elasticity of Supply

It measures the responsiveness of the quantity supply by changing the price of the products while keeping all other factors constants. (Investing Answer, 2020).

Elasticity of Supply = Percentage change in quantity supplied / Percentage change in price

If the demand of a product is increases then the price rises and the quantity supplied also increases.

Example:

Price of pizza rises by 40 percent and the quantity of Pizza supplied also rises by 26 percent, how much change happens in the elasticity of supply of this good.

Elasticity of Supply = percentage change in quantity supplied /Percentage change in price

Elasticity of Supply = 0.26 / 0.40 = 0.65= 65%…………………..

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