Elastic Demand, Inelastic Demand and Unit Demand Essay Example

percentage change in demand that surpasses the percentage change in price.

The concept of unit elastic demand is different from both elastic and inelastic demand. When the price changes, unit elastic demand occurs when there is no impact on total revenue (McConnell, Brue, Flynn, 2012). This means that the percentage change in demand is equal to the percentage change in price. Regardless of other factors, any price changes will always result in either an increase or decrease in quantity demanded, but total revenue remains constant. As a result, the product can be considered as having unit-elastic demand.

The concept of Cross Price Elasticity discusses the relationship between two goods or services in terms of how changes in the price of one item impact the demand for the other.

In order to fully understand demand elasticity, it is important to consider the impact of substitute goods and complementary goods. This concept is known as cross elasticity of demand or cross price elasticity. The objective of price elasticity is to determine how consumers react to changes in the price of one product compared to the resulting percentage change in demand for another product. To calculate cross price elasticity, it is necessary to divide the percentage change for one product by the percentage change for another product. The resulting coefficient will indicate whether the findings are positive or negative (McConnell, Brue, Flynn, 2012).

Substitute goods are items that can easily be used in place of another item when the other item becomes scarce or too expensive. If the cross price elasticity formula is applied to both items and produces a positive coefficient, then the

two items are considered substitutable. For example, if the cost of diet coke rises and consumers begin purchasing more diet pepsi instead, this indicates a positive coefficient in the cross price elasticity formula, suggesting that these products are substitute goods with high substitutability. Conversely, complementary goods are items that depend on each other rather than replacing one another.

Both spaghetti sauce and spaghetti noodles are regarded as complementary goods, as they rely on each other to create a full spaghetti meal even if they are bought separately. By dividing the percentage change in quantity demanded for spaghetti sauce by the percentage change for spaghetti noodles, we can determine their negative coefficient that confirms their complementary connection. Additionally, changes in prices of these complementary goods also affect their demand for one another. For example, when the price of spaghetti sauce rises, it leads to a decrease in the demand for spaghetti noodles.

When the price of spaghetti sauce goes down, it leads to an increase in demand for spaghetti noodles. Therefore, a negative coefficient in the output of the cross price elasticity formula indicates that these products are considered complementary goods.

The formula for income elasticity is used to measure the impact of changes in consumers' income on their purchasing power and demand for a product. It provides insights into how fluctuations in income influence consumers' decisions to increase or decrease their purchase of a specific product.

The income elasticity formula calculates the coefficient by dividing the percentage change in quantity demanded of a specific product by the percentage change in income. The coefficient can be positive or negative, with zero as

the threshold. A positive coefficient signifies that the product is classified as a normal/superior good, whereas a negative coefficient suggests that it is an inferior good. Normal/superior goods are products that vary according to changes in income.

The formula for income elasticity of demand for normal goods indicates that when consumers' income rises, their demand for these goods also increases. Conversely, if consumers' income decreases, the demand for normal goods decreases as well. Assuming all other factors remain constant and with a threshold of 0, the quantity demanded of normal goods moves in the same direction as changes in consumer's income. Therefore, when a consumer's income increases, the demand for normal goods increases accordingly; likewise, if their income decreases, the demand for normal goods also decreases.

Inferior goods are products that become less popular among consumers when their income changes. The demand for an inferior product, as determined by the income elasticity formula, will have a negative coefficient. When a consumer's income increases, the demand for inferior goods decreases due to this negative coefficient. Conversely, if a consumer's income decreases, the demand for inferior goods increases. Assuming all other factors remain constant and keeping the income elasticity threshold at zero, the demand for inferior goods moves in opposition to changes in a consumer's income. Inferior goods can be identified by their negative coefficient for income elasticity, which is less than zero.

The presence of multiple substitute goods can impact the price elasticity of demand by increasing the chances that consumers will choose differently. For example, when purchasing cereal and milk from a grocery store, having a variety of options enables consumers to

contemplate alternative choices.

When shoppers arrive at the cereal aisle, they immediately notice that their preferred cereal, Coco Pebbles, has become significantly more expensive. However, there is a wide range of cereals available at various prices throughout the entire aisle. After carefully considering their options, they come across an affordable alternative called Coco Puffs. As they move towards the milk section, they soon realize that milk prices have also increased. Upon evaluating their choices, they discover that all types of milk, including 2% and whole milk, have experienced price hikes. Consequently, if they want to enjoy their cereal, they have no choice but to pay the higher price for milk.

The presence of cheaper options enables consumers to enhance the responsiveness of price elasticity of demand. Yet, when there are no alternative products accessible, consumers are obliged to pay the requested price. This is referred to as element E ; E1. In general, consumers allocate a uniform portion or percentage of their monthly income for particular goods or services.

The proportion of income spent by consumers on regularly purchased items is determined by the price of a product. If two products experience a 50% change in price, the impact on the consumer's proportion of income remains unchanged as long as all other factors remain constant. For example, if deodorant normally costs $2.00 and increases to $3.00, the consumer may not even notice the price increase and continue purchasing it regularly. This illustrates that deodorant represents a small percentage of the consumer's income, categorizing it as an inelastic product.

The consumer's demand for deodorant is predicted to stay the same, while the

rent cost rises from $1,000.00 per month to $1,500.00. This increase in rent leads the consumer to look for a cheaper rental property, highlighting the large portion of their income that goes towards rent and emphasizing the high elasticity of demand for rent. As a result, the consumer either refuses to pay the higher rent or asks for a lower amount.

The time available for consumers to respond influences their reaction to price changes. If the product price rapidly increases, consumers have less time to react. On the other hand, if the price gradually increases over a longer period, consumers have more time to respond. It is important to understand the concept of Consumer Time Horizon in order to comprehend how consumers respond to price hikes.

The concept of consumer time horizon, as explained by course mentor Wade Roberts, has an impact on demand elasticity. According to Roberts, demand is more elastic in the long run compared to the short run. This means that when prices temporarily rise, consumers may not have enough time to explore alternative choices for the product. To illustrate this point, let's consider a situation where the price of milk per gallon increases for only one month. In such a scenario, consumers who usually buy 2-3 gallons of milk per month may not have sufficient time to consider other options as a replacement for the product.

When the consumer purchases their first gallon of milk, they observe a price change but deem it insignificant enough to impact their decision. When buying the second gallon, they take note of the price increase yet still choose to make the purchase.

However, upon purchasing the third gallon at an elevated price, they begin contemplating other potential substitutes. Nonetheless, in the subsequent month, when acquiring another gallon of milk at its usual price, they no longer contemplate alternative options.

The extended duration of price hikes provides consumers with sufficient time to react and explore alternate options to substitute the product. For instance, when the price of milk remains high over an extended period of one year, consumers have the opportunity to consider alternative substitutes. As the length of time with elevated prices persists, consumers actively seek out more affordable alternatives like silk and other milk substitutes. Despite their preference for milk products, consumers are willing to settle for a reasonable substitute during prolonged price increases.