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How Does the Consumer Respond to change? - Elasticities of Demand

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Introduction

How Does the Consumer Respond to change? Elasticities Income Elasticity of Demand 1. Copy the following The theory of demand has already demonstrated that as income changes people will change their spending patterns. They will buy more of some things and less of others. The relationship between income and demand for a product is known as the income elasticity of demand. It refers to the responsiveness of demand to changes in income. The following formula is used to enable one to determine the exact relationship in terms of its elasticity. 0/0 change in the quantity demanded____ 0/0 change in income The following table provides explanations of how to interpret the result of an income elasticity calculation. ...read more.

Middle

* Adapt the figures again but this time to get a negative elasticity. Explain what you have done and the meaning of your elasticity figure. Price Elasticity of Demand 1. Copy the following The theory of demand has already demonstrated that changes in the price of a product will lead corresponding changes in demand for that product. Price elasticity of demand concerns itself with the responsiveness of demand to any change in price. The relationship and elastic nature is calculated using the following formula. 0/0 change in the quantity demanded___ 0/0 change in price 2. Copy the following table If the result is What it means It is known as Less than 1 Demand will change ...read more.

Conclusion

* Adapt the figures in the example to show a product that has unitary elasticity of demand. Explain what you have done and what the resulting figure shows. * Adapt the figures in the example to show a product where demand is price inelastic. Explain what you have done and what the resulting figure shows. Who gets what? Read pages 127-128 and answer the following questions. 1. What is the price mechanism? 2. How has the price mechanism re-allocated unemployed workers from the mining industry to other occupations? 3. What is meant by the term allocative efficiency? 4. How does allocative efficiency work? 5. Why are some wages not set by the market? ...read more.

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