Question

Define the concept of price elasticity of demand and describe how an increase in the number of substitute products affects the price elasticity of demand of a good.

Answer #1

A price elasticity of demand is the measure of how responsive a particular product is with a change in the price i.e. how much the quantity demand for the product change with a change in the price of that product.

Presence of a substitute increases the price elasticity of that product. For example, consider a situation where there is no substitute for wine. The price elasticity of wine will be less i.e. the demand for the wine will not change much if the price of wine increase or decrease. But, now a new substitute for wine has come up. That means if the price of the wine increase consumer has another choice to move to. This will increase the elasticity of the product. More substitute people have more elastic the product demand get.

The concept of price elasticity of demand is an important concept
in demand analysis in an industry (Rothschild Index)
Describe how this applies to business decisions. Give it
examples of cases relevant to business

Price elasticity of demand is an important concept. With
appropriate examples, explain how this concept is related to total
revenue. (Hint: When providing example, select a product whose
demand may be relatively elastic; therefore, lowering its price may
lead to increase in total revenue. This will allow other students
to choose a different example.)

Define the price elasticity of demand and explain how total
revenue is related to price elasticity.

Explain the concept of cross price elasticity of demand and
describe the two cases that determine whether it is positive or
negative.

a-Define the demand function of a good and its price elasticity
of demand.
b- Suppose that the government wants to maximize tax revenue.
Explain why it may be not a good idea for the government to raise
tax rates for a good with a price elasticity of demand more than
one.

2. Calculate price elasticity of demand, cross price elasticity
of demand and income price elasticity of demand. Then indicate
whether the alternative good is a complement or substitute. P =10,
PA=20, and I =100.
a) Q = 500 - 3P + 4PA + I (I stands for income)
b) Q = 100 - 0.1P - 0.5PA - 0.2I

• The price elasticity of demand is |-2|
• The income elasticity of demand is -1.5
• The cross-price elasticity of demand between your good and a
related good is -3.5
a. Describe what would happen to total revenue for your good if
you raised your price by 10 %
b. Describe what would happen to total revenue for your good if
a recession lowered incomes by 10%
c. Describe what would happen to total revenue for your good if...

how would a business manager apply the concept of "price
elasticity of demand" in an organization?

How does the Beyonce Irreplaceable video relate to the concept
of price elasticity of demand?

In
4-6 sentences, discuss how understanding the concept of price
elasticity of demand is useful for a business owner/firm operating
in any market structure. Copying the definition or restating the
definition of elasticity will result in loss of points. (What does
price elasticity of demand tell the firm in terms? How can they use
that information to their benefit? Discuss the types of
elasticity?)

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