Unit 4 Discussion

Unit 4 Discussion Elasticity The concept of elasticity of demand is a measure of how sensitive the demand for a product or service is to changes in its price. It quantifies the degree of responsiveness or reaction in the quantity demanded when there is a change in price. Elasticity of demand helps us understand the magnitude and direction of the impact of price changes on consumer behavior. The formula to calculate the elasticity of demand is: Elasticity of Demand = {96 change in quantity demanded) / {96 change in price) The result of this calculation provides a numerical value that indicates the elasticity of demand. There are three types of elasticity of demand: elastic, inelastic, and unitary elastic. Elastic Demand: If the elasticity value is greater than 1, it signifies elastic demand. In this case, a small change in price leads to a proportionately larger change in the quantity demanded. For example, if the price of a product increases by 10% and, as a result, the quantity demanded decreases by 20%, the elasticity of demand would be negative 2096/1096 = -2. The reason that the percent change in quantity is a negative number is because it shows the direction of the change, which, in this case, is a decrease. However, we drop the negative sign, anyway, because what we're really concerned about is the total percentage change in quantity demanded as compared to the percentage change in price. Inelastic Demand: If the elasticity value is less than 1, it indicates inelastic demand. Here, the change in price has a relatively smaller effect on the quantity demanded. For instance, if the price of a product increases by 10% and the quantity demanded decreases by only 5%, the elasticity of demand would be -0.5. Again, we drop the negative sign, because it is only showing us that the quantity demanded decreased, rather than increased, which means the price elasticity of demand is 0.5, which is less than 1, and people's buying behaviors have not changed very much. Unitary Elastic Demand: If the elasticity value is exactly 1, it denotes unitary elastic demand. In this case, the percentage change in quantity demanded is equal to the percentage change in price. For example, if the price of a product increases by 10%, and the quantity demanded decreases by 10%, the elasticity of demand would be -1. Something to keep in mind is that the availability of substitutes affects the price elasticity of demand by influencing consumers' options, preferences, and ability to switch to alternative products when the price of a specific product changes. Questions for Initial Response 1. Identify a good or service you believe is likely to have elastic demand and explain why. 2. Identify a good or service you believe is likely to have inelastic demand and explain why. 3. Identify a good or service you believe is likely to have My elastic demand and explain why. 4. Identify at least two factors that can affect a good or service's level of elasticity. 5. Explain why business owners would want to know whether the demand for their goods or services is considered elastic, inelastic, or unitary elastic