Price Elasticity and Supply & Demand Essay Sample

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Introduction of TOPIC

Fill in the matrix below and describe how changes in price or quantity of the goods and services affect either supply or demand and the equilibrium price. Use the graphs from your book and the Tomlinson video tutorials as a tool to help you answer questions about the changes in price and quantity

Event Market affected by event Shift in supply, demand, or both. Change in equilibrium Explain your answer. Frozen orange crops in California Orange juice Supply (left)—Not as many available Price will increase and quantity will oranges to offer consumers. decrease. Hurricanes in the Gulf Coast Oil supplies Supply (left) – Oilrigs damaged or Price will increase and quantity will destroyed in the Gulf Coast resulting decrease. in reduced production. Cost of cotton decreases Clothing, Textile Both (right)- cost of producing Price will decrease and quantity will textiles and clothing can be reduced increase allowing for more supply and lower costs to the consumer Technology improves efficiency in Food Industry, Restaurant, Grocery Supply (right) – quantity goes up from Price will increase and quantity will pasta manufacturing manufacturing increase

1. What do substitutes refer to in economics? Give an example of two substitutes. Substitutes are two goods for which an increase in the price of one leads to an increase in the demand for the other. (N. Gregory Mankiw, 2012, p. 68) Two examples of substitutes would be: soda vs. juice and broccoli vs. green beans even turkey vs. ham.

2. Define “Price Elasticity of Demand.” Give an example. The Price Elasticity of Demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price. (N.Gregory Mankiw, 2012, p. 90) An example for the Price Elasticity for Demand would be the home theatre system. Substitutes are available in regards to the components that comprise the systems themselves the systems themselves also fall into the category of t necessities and luxuries as for some they are need others not so much. The market also has an effect for example; I used to work for a

home theatre install business before the subprime market collapse happened. At that time many people

where buying high dollar systems and installing them into their houses after the market collapse nothing not a single unit sold for weeks until finally the shop closed.

3. Determine if the demand for the following products is price elastic or price inelastic, and explain your answer. In your explanation, be sure to include how the necessity of a good and the availability of substitutes affect the price elasticity of demand in each of these specific cases:

• Gasoline as a commodity
• Inelastic, vehicles run on gas and the fueling infrastructure is designed for fossil fuels. However, other vehicles are being made such as hybrids that use less gas as well as natural gas or biodiesel, which may change how inelastic this commodity is. There are substitutes but the
primary infrastructure is designed with fossil fuel delivery in mind. Almost all vehicles run on gas it is needed with little to no substitute

• Gasoline sold at a local gasoline station

• Elastic, With the local gas stations there is competition for business as the commodity itself has little to no substitute the option of whom to buy the gas from now becomes what is elastic about this precious resource. The necessity of the good is paramount the prices of the gas at particular gas stations become the substitutes, almost phantom products if you will.

• Hotel rooms for people planning a vacation

• Elastic, vacation time is most certainly a luxury and although at times needed for mental sanity one can live their entire life without one and still be fine. As with the local gas station comparison-shopping is king, which becomes the substitute for one hotel versus another.

• Hotel rooms for people on business to meet an important client • Elastic/Inelastic, depending on how important the contract is or what the client has to bring to the table the hotel may not be and option. But otherwise this is most certainly a luxury. However, depending on the caliber of hotel there may be little to no substitute for quality and prestige of the particular establishment.

4. Define the Law of Demand and the Law of Supply. Give an example for each.

The Law of Demand is the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises. (N. Gregory Mankiw, 2012, p. 65) The Law of Supply is the claim that, other things equal, the quantity supplied of a good rises when the price of a good rises (N. Gregory Mankiw, 2012, p. 71) A good example for the law of demand would be exotic cars. For instance, Lamborghini makes a select number of cars and that are all for the year and sometimes even for the model if it is a special edition. This creates scarcity and makes the product, in this case the Lamborghini, rare and difficult to acquire hence the increase in price. Conversely, the example for the law of supply would be the computer. As supply and technology increase and evolve the price of the computer goes up with it but also creates new lower price segments for lesser model computers. But generally computers are produced in mass quantities along with other personal electronics that also increase in price as the goods production increases.

References:

(N. Gregory Mankiw, Principals of Economics, 4e, Cengage Learning

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