Think of another good that you have purchased recently (or you could continue wi

Question

Think of another good that you have purchased recently (or you could continue with the good you selected in TDA I). Be specific (e.g. is it breakfast cereal in general or Cheerios cereal specifically). If the price of this item increases, how would this affect the quantity of the good that you consume? Is the Demand for this good Price elastic or Price inelastic? Justify your classification by talking about the determinants of elasticity as they apply to this product. Say price is on the rise for this product and you are the manager of a store, would you be thrilled to be selling this product? Under what circumstances would you want to own a business that sells this product? In other words, how does an increase in price for this good affect your Total Revenue? Using specific examples, relate the concepts of Cross Elasticity and Income Elasticity to this product.

Explanation / Answer

Let us use frosted flakes for our example. We are an avid buyer of a specifec General Mills Frosted Flakes cereal, however, the price just rose from $3 a box to $5 a box, my quantity demanded has just moved downward along the demand curve. Since the price rose, I no longer desire 3 boxes of this cereal and now only would like to purchase 1 box. This in turn, make the price elasticity od demand for this specific cereal elastic. This is mainly because of the wide array of substitutes availabe. I can easily switch to the store brand of frosted flakes or even a different but similar cereal all together. Mayb I'll try Froot Loops. Since the price elasticity for damand is quite elastic, the slope of our demand curve although negative is close to 0. and our elasticity is also negative but close to 0. As a manager of the store, I would not like the price increase on this cereal. Although it seems like more money will be made by the price increase, the demand will fall substantially leaving a social welfare loss (dead weight loss). However, I would love to sell this product if the price elasticity for demand was inelastic. Such as, this being the only type of cereal available on the market. In this case, an increase in price fro $3 to $5, the demand would fall but only slightly. My elasticity would be close to -1 and I would essentially be a monopoly. If price rose, my total revenue would increse although there would be a social welfare loss. The crice price elasticity would not effect my product simply because it has an inelastic demand.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.