Price elasticity of demand essay questions

Elasticity of scale or output elasticity measures the percentage change in output induced by a collective percent change in the usages of all inputs. [3] A production function or process is said to exhibit constant returns to scale if a percentage change in inputs results in an equal percentage in outputs (an elasticity equal to 1). It exhibits increasing returns to scale if a percentage change in inputs results in greater percentage change in output (an elasticity greater than 1). The definition of decreasing returns to scale is analogous. [4] [5] [6] [7]

Thus, for necessity goods (such as staple foods and, in the case of petroleum-dependent societies, petroleum products), which have a low price elasticity of demand, the market price is much more sensitive to shifts in supply. In particular, a small supply shock can cause a significant increase in price. The main explanation for this massive shift is that, because of the relative inelasticity of demand to price, the price needs to be increased significantly to induce people to cut down on demand in order to compensate for the reduction in supply.

The rational addiction model by contrast rejects the proposition that smokers behave myopically. It asserts that even addicted individuals do take into account future costs. The model assumes that addicted smokers make a rational choice, weighing up the pleasure of current smoking and the unpleasantness of withdrawal that comes with quitting on the one hand and the cost of current and continued smoking and the long-term health effects on the other. Different people will make different decisions depending on how much they value good health, how unpleasant they believe it will be to quit, and how much financial pressure they are under. Individuals also differ in the extent to which they prefer short-term over long-term benefits. Nevertheless, the choice an individual makes will take all relevant factors into account and be a rational one. Proponents of the rational addiction model such as Becker and Murphy 36 have demonstrated that current consumption of an addictive good tends to be inversely related not only to the current price of the good but also to the past and predicted future prices. 37, 38 The model also suggests that more-educated and older people will be responsive to both new information and to price increases, and that less-educated and younger people will be much less responsive to information about long-term effects and relatively more responsive to immediate changes in price.

Generally, a curve is elastic if it is flat and more inelastic if it is more verticle. However, this can be a little misleading. Even on a linear (straight) demand or supply curve, the elasticity is not constant for the whole curve. The reason for this is that we are measuring the percentage change in both price and quantity. As you move along a linear curve and approach one of the axes, the percentage changes in that axis variable (either price or quantity) get smaller and smaller and the percentage changes of the opposite axis get bigger and bigger. Price elasticity does NOT have a unit attached to it. That is, price elasticity is not measured in dollars or %, it is simply a ratio.

Price elasticity of demand essay questions

price elasticity of demand essay questions

Generally, a curve is elastic if it is flat and more inelastic if it is more verticle. However, this can be a little misleading. Even on a linear (straight) demand or supply curve, the elasticity is not constant for the whole curve. The reason for this is that we are measuring the percentage change in both price and quantity. As you move along a linear curve and approach one of the axes, the percentage changes in that axis variable (either price or quantity) get smaller and smaller and the percentage changes of the opposite axis get bigger and bigger. Price elasticity does NOT have a unit attached to it. That is, price elasticity is not measured in dollars or %, it is simply a ratio.

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