ECON 203 Graded Activity 2 #1 Based On The Determinants Of E

ECON203 Graded Activity 2 #1 Based on the determinants of elasticity as discussed in the text, explain what the price elasticity of demand of the following products would be

Based on the determinants of price elasticity of demand, we analyze how responsive the quantity demanded of various products is to changes in their prices. The key determinants include the availability of close substitutes, the proportion of income spent on the good, the necessity versus luxury nature of the product, the time horizon for consumers to adjust, and the definition of the market. Applying these principles, we evaluate the expected elasticity for each given product: ballpoint pens, Crest toothpaste, diamond rings, sugar, and refrigerators.

Paper For Above instruction

The price elasticity of demand (PED) measures how much the quantity demanded of a good responds to a change in its price. Specifically, it is the percentage change in quantity demanded divided by the percentage change in price. The determinants of PED influence whether demand tends to be elastic (responsive), inelastic (less responsive), or unitary (proportional response).

Firstly, the availability of close substitutes significantly impacts elasticity. When substitutes are readily available, consumers can easily switch products if a price changes, making demand more elastic. Conversely, if substitutes are limited, demand tends to be inelastic.

Secondly, the proportion of income spent on the good influences elasticity. Products that constitute a larger share of a consumer’s income tend to have more elastic demand because price changes have a more noticeable impact on the consumer’s budget.

Thirdly, the necessity versus luxury aspect affects elasticity. Necessities, such as basic food items or medicine, typically have inelastic demand because consumers cannot easily reduce their consumption regardless of price changes. Luxuries, on the other hand, tend to have more elastic demand.

Fourthly, the time horizon plays a role. In the short term, demand is often less elastic because consumers need time to adjust their habits. Over the longer term, demand can become more elastic as consumers find substitutes or change consumption patterns.

Considering these determinants, we can assess each product:

a) Ballpoint Pens

Ballpoint pens generally have many substitutes such as pencils and digital note-taking tools. They are inexpensive and often considered non-essential for most consumers, especially given the advent of digital technology. Therefore, the demand for ballpoint pens tends to be elastic; a small increase in price might lead consumers to switch to alternatives. Conversely, in bulk purchases or for specific professional needs, demand might be less elastic due to habitual or contractual reasons.

b) Crest Toothpaste

Crest toothpaste is a necessity for many households with limited close substitutes in brand loyalty. However, several brands are available, and consumers may switch if prices increase significantly. The demand is relatively inelastic because it is a daily essential, yet somewhat elastic due to substitutes and the possibility of switching brands. The impact of price changes on demand will depend on consumer preferences and brand loyalty.

c) Diamond Rings

Diamond rings are luxury items, often purchased for special occasions like engagements or weddings. They have limited substitutes, and prices tend to be high relative to the average consumer’s income. Because of their luxury status and the emotional value attached, demand for diamond rings tends to be inelastic. Consumers are less responsive to price increases, especially during specific life events or for symbolic reasons.

d) Sugar

Sugar is a staple in many diets and is relatively inexpensive. It is also highly substitutable within a range of sweeteners, but for most consumers, the lack of immediate substitutes makes demand somewhat inelastic at low price levels. However, if prices increase significantly, consumers might reduce consumption or switch to alternatives like artificial sweeteners. Overall, sugar tends to have inelastic demand in the short run but could become more elastic over time with the availability of substitutes and changing consumption habits.

e) Refrigerators

Refrigerators are durable and essential household appliances. The demand for refrigerators is relatively inelastic because consumers do not need to replace them frequently, and there are limited substitutes for the function they serve. Price increases might not drastically reduce demand, although in the long term, higher prices may discourage new purchases. The high cost and necessity make the demand for refrigerators generally inelastic.

Conclusion

In summary, the determinants of elasticity—availability of substitutes, necessity versus luxury, proportion of income, and time—significantly influence the demand responsiveness of these products. Ballpoint pens and refrigerators tend to have elastic and inelastic demand respectively, based on their substitutability and necessity. Crest toothpaste exhibits somewhat inelastic demand with potential elasticity depending on consumer preferences. Diamonds, being luxury goods, show inelastic demand, while sugar's demand response varies with price changes and consumer adaptability.

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