Actions for Discussion 3.1: Your Price Elasticities of Demand Must post first. P

Question

Actions for Discussion 3.1: Your Price Elasticities of Demand Must post first. Participate in a discussion with your classmates by applying this concept to your life by estimating your price elasticities of demand for products you routinely purchase. Review the “EYE on Your Life” caption titled “Your Price Elasticities of Demand” on page 131 in the textbook. Describe and discuss your price elasticities for such products and discuss the movement of your demand for such a good when the price of that good rises. Share with your classmates whether your demand for the selected good is elastic, unit elastic, or inelastic.

Explanation / Answer

Answer:

As per the law of demand, the demand of a product decreases if the price goes up and conversely the demand increases when the price goes down (keeping all other things same)

Price elasticity of demand measures the responsiveness of the quantity demanded of a particular good or service to a change in its price keeping the other influences same.

Depending upon the change in percentage quantity demanded as a result of percentage change in price, the demand could fall in three categories: either elastic, unit elastic or inelastic.

Products discussed on page 131: 1) gasoline 2) cell phone service 3) ipod and itunes

1) Gasoline: the demand for gasoline is inelastic, that means if the price of the gasoline increases still the demand doesn't change much. Though it is expected that an increase in price should lead to a decrease in gasoline demand, however, in reality the consumption of gasoline remains constant as it is a necessary commodity. So for gasoline the quantity demanded is insensitive to the change in price (inelastic demand).

2) Cell Phone Service: If the price of using cell phone increases or decreases then the demand would not change much. This is because mobile phone is an essential service and any increase in price would not dissuade many customers to leave the service provider.Therefore the demand would be inelastic.

3) Ipod and Itunes: Ipods and Itunes are complement to each other. If the price of ipods or itunes is increased it would lead to a decrease in demand and if the price of ipod or itunes is decreased it would lead to an increase in demand. Hence the demand in this case is elastic.

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