5. Use an elasticity concept to explain each of the following observations. 3 i.

Question

5. Use an elasticity concept to explain each of the following observations. 3
i. During economic booms, the number of new personal care businesses, such as gyms and tanning salons, is proportionately greater than the number of other new businesses, such as grocery stores.
ii. Cement is the primary building material in Mexico. After new technology makes cement cheaper and easier to produce, the supply curve for Mexican cement industry becomes relatively flatter.
iii. Recent attempt by the Columbian Army to stop the flow of illegal drugs into the USA have actually benefitted the drug dealers.

Explanation / Answer

a. During times of economic boom, incomes rise. Whether, and by how much,
demand responds to changes in income is determined by the income elasticity of
demand. Since the demand for personal care services increases as income increases, personal care services are a normal good. If the demand for personal care services is more responsive to changes in income than the demand for other products,
the income elasticity of demand for personal care services is greater than the
income elasticity of demand for other products. As a result of the proportionately
greater increase in demand, you would see the quantity of personal care services
supplied increase by proportionately more.

b. New technology has made cement easier to produce. This implies that as the price
of cement rises, many more firms are now willing to supply cement than before;
that is, supply has become more elastic, leading to a relatively flatter supply curve.

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