Economics assignment
A good with many close substitutes is likely to have relatively elastic Correct demand, because consumers can easily choose to purchase one of the close substitutes if the price of the good rises.
Points:
1 / 1
Close Explanation
Explanation:
The price elasticity of demand measures the responsiveness of consumers to changes in price. For example, if consumers change their purchasing behavior very little in response to a drastic change in price, demand is said to be inelastic; but if consumers change their purchasing behavior a lot in response to a small change in price, demand is said to be elastic.
If a good has several close substitutes, then many consumers will respond to an increase in the price of the good by purchasing one of those close substitutes. For example, many people believe that Coke and Pepsi are close substitutes. Therefore, holding the price of Pepsi constant, if the price of Coke were to increase, many consumers would switch to Pepsi. Therefore, the demand for Coke is relatively elastic. By contrast, there are no close substitutes for insulin as a treatment for diabetes. As a result, an increase in the price of insulin will not lead to a noticeable decline in insulin consumption. The demand for insulin is thus relatively inelastic.
A goods price elasticity of demand depends in part on how necessary it is relative to other goods. If
the following goods are priced approximately the same, which one has the least elastic demand?
· Yacht ( You answered this option which turned out to be wrong)
· Chemotherapy for cancer patients
Explanation:When people buy a luxury good, such as a yacht, the price of the good and the prices of similar goods (for example, other yachts) will be major factors in their purchasing decisions. When people decide whether to purchase a necessary medical treatment, price is much less of a factorespecially if no other treatments can achieve the same result. Since the price elasticity of demand measures the responsiveness of buyers to changes in price, the elasticity of demand for chemotherapy for cancer patients is likely to be much lower than the elasticity of demand for yachts.
Price elasticity for a good depends on the share of a consumer’s budget spent on a good. Other things being equal, which of the following goods has the most elastic demand?
· Computer
· Laundry detergent
· Salt ( You answered this option which turned out to be wrong)
Explanation: Other things being equal, the higher the price of a good relative to consumers’ incomes, the greater the price elasticity of demand. Hence, the price elasticity of demand for low-priced items, such as salt and laundry detergent, tends to be lower than the price elasticity of demand for relatively expensive items that represent a significant fraction of annual incomes for most families, such as a computer. Be sure to consider not just the price, however, but also the overall portion of a consumer’s budget spent on an item. For example, one latte costs only $3.00, but for daily coffee drinkers the annual expense could be around $1,000. The elasticity of demand for lattes is therefore likely to be higher than that for other low-priced items (such as salt) that may need to be purchased only a few times annually.
The price elasticity of demand for a good also depends on how you define the good.
Organize the goods found in the following table by indicating which is likely to have the most elastic demand, which is likely to have the least elastic demand, and which will have demand that falls in between
The red spots mean that they were also a correct option for those categories.
Explanation: The overall category of clothes has no close substitutes, so the demand for clothing, in general, is very inelastic. However, the more specific the type of clothing, the more close substitutes are available. If the price of pants rises, a consumer could purchase shorts or capris, but most people would not consider those very close substitutes. If the price of boot-cut jeans rises, consumers could switch to khakis or skinny jeans.
The price elasticity of demand is also affected by the given time period, sometimes called the time horizon.
Other things being equal, the demand for natural gas will tend to be ( more: You answered this option which turned out to be wrong) elastic in the short run than in the long run.
Explanation: More substitutes are available in the long run than in the short run. If the price of natural gas triples tomorrow, households that currently use natural gas will have very few alternatives for heating and cooking in their homes. In the very short run, the demand for natural gas is highly inelastic. If the price stays high for a few weeks, families will try to save on heating bills by dressing more warmly and reducing the average temperature in their homes. If the price of natural gas stays high for a very long period of time, more and more households will take measures to increase the heating efficiency of their homes or switch to alternatives such as solar power. Since consumers face fewer alternatives to natural gas in the short run, the short-run demand for natural gas is less elastic than the long-run demand for natural gas.
