Elasticity concepts
State the (midpoint) formula for calculating price elasticity of demand.
Price elasticity of demand is arrived at by evaluating the percentage change in the quantity of demand divided by the price percentage change (Shishkin & Olifer, 2017).
Describe elastic demand.
Elastic demand refers to sensitivity situations of a service or product against changes in price. For instance, an increase in product selling price will consequently reflect a decreased number of units sold. In such a case, consumers greatly react to changes within the price of the products. Price decrease gives them leverage to make more purchases while price increase makes them purchase less.
Describe inelastic demand.
Inelastic demand refers to situations where the demand by the consumer does not change relative to changes within the price. This can be the situation experienced in different everyday household services and products. 20% price increase in these products can, for instance, realize a 2% demand decrease. Don't use plagiarised sources.Get your custom essay just from $11/page
Describe unit elastic demand.
This refers to an economic theorem that holds the assumption that price changes will result in equally proportional changes to the quantity demanded (Zetina, Contreras & Cordeau, 2019). It, therefore, refers to demand that is responsive to price changes perfectly by the same percentage. It, therefore, gives a unit per unit change in price and demand.
Explain when demand would be perfectly elastic.
Perfect elastic demand curves exits in markets that experience perfect competition. This will require the existence of a small firm in the market and that produce goods that are identical to each other. No single market player, in this case, has a direct impact on the products and services price. The only primary point of motivation to buy customers, in this case, is the price.
Explain when demand would be perfectly inelastic.
Price inelasticity applies in situations where price is not the only major determinant of price. This can be the case on an item that people must have regardless of the price. For instance, a price increase on gasoline will not reflect a direct decrease in its demand sine drivers must purchase the same amount regardless of the price. Other primary motivators such as the quality of the product may fuel an inelastic demand.
Explain how price elasticity of demand affects the relationship between price and total revenue.
In situations of price elasticity, decreasing prices will increase revenue. I price elasticity, changes results in changes in demand and on the other hand, price variations. Varying interactions of these factors result in major impacts on a firm’s revenue state. An increase in prices leading to an increase in revenues from units sold thus reflecting a price effect while consequently, it leads to the sale of fewer units (Quantity effect).
- State the formula for calculating the cross elasticity of demand.
Cross elasticity of demand is calculated by obtaining the percentage change demand on the quantity of a particular good and dividing it by the price percentage change of other goods (Wardman, Toner, Fearnley, Flügel & Killi, 2018).
- Explain how cross elasticity of demand is used
It serves as an economic value of determining the response quantity demand of a particular product with price changes of other products in the market. This is of value in defining the relationship between complementary goods and substitutes. Demand for substitutes increases while that for complimentary decreases as the price of the primary good increases.
- State the formula for calculating the price elasticity of supply.
It is arrived at by evaluating the percentage change in the quantity of a product or services supplied and dividing it by the percentage change of price (Mason & Roberts, 2018).
- Describe elastic supply.
The elasticity of supply is measured by the proportionate quantity change ratio regarding the proportionate change in the price of the products. When elasticity is high in this case, it indicates a high sensitivity to price changes. Consequently, low supply elasticity shows low sensitivity to variations of price.
- Describe the inelastic supply.
Inelastic supply refers to situations when the percentage change in supply is lower than the percentage price changes. For instance, a 25 percent price drop of a commodity accompanied by a 2% supply decrease indicates an inelastic supply. In such a case simply, the quantity of goods producers are willing to produce has no linear correlation to the market price.
Describe the unit elastic supply
This refers to a supply curve that responds perfectly to price changes. Changes in price by a unit will lead to a consequential unit change in supply (Mason & Roberts, 2018).
Explain when supply would be perfectly elastic.
Some situations promote the existence of an elastic supply in the market though it rarely occurs. The existence of perfect competition in the labor market for instance with the existence of many hiring firms and companies may promote the existence of a perfectly elastic supply market. In such situations, wages are directly determined by the entire industry, unlike specific firms.
Explain when supply would be perfectly inelastic.
This is the major scenario concerning the price and supply of commodities. Different factors affect the supply of products irrespective of the prevailing market prices. Chances of the existence of perfect competition scheme is also hard to exist in the market. The existence of different forces of supply such as changing government regulations, seasons and leverage on the application of technology by some industrial players drives perfect inelastic market scenarios (Mason & Roberts, 2018).
Explain how price elasticity of supply changes over time.
Elasticity of products changes over time as producers increasingly gain the ability to produce more products on a higher percentage than the price increase. This can be regarded as an increased ability to enjoy opportunity cost and the ability to carry out production is not largely affected by price.
Describe the conditions under which consumers will pay the full tax.
The relative elasticity of demand and supply determines who will pay the tax. When the elasticity of demand is lower than that of supply, buyers bear the larger tax burden. Such situations indicate that the demand level will not be affected by price changes. The condition prompts sellers to put all their responsive taxes to the buyers.
Describe the conditions under which producers will pay the full tax.
In situations when the elasticity of demand is lower than that of supply, the producer beers all the tax. Changes in the price product, in this case, would greatly affect its demand and the purchasing ability of the consumer. The producer, therefore, has to burden the entire tax.
Explain how the government can maximize tax revenues.
The government has several options for maximizing and increasing tax revenues. These options may include expanded tax bases, increasing tax rates, improving enforcement, reducing tax breaks and levying new taxes (Black, 2018). Such efforts increase the tax coverage or the amount that individuals have to part with. The government can also indirectly maximize revenues facilitating policies that increase income, economic activity and wealth.