ECONOMIC GOODS AND ELASTICITY



Question:

Answer the following questions on economic goods and elasticity (1)What are 2 contrasts between normal and inferior goods? (2) What are Substitute Goods? (3) Define Price Elasticity of Demand (4) List and define at least 3 types of Elasticity.

Answer:

1. What are 2 contrasts between normal and inferior goods?

The contrast between the normal goods is that normal goods increases in demand as the income of individual increases whereas increase in income leads to a fall in demand for inferior goods (Singh 2009, p.8). Thus the characteristics of normal goods set it apart from inferior goods. For example, when an individual is unemployed, food demand is generally reduced to staples (inferior goods) however when that individual is employed, the increase in income does not necessarily result in increase in the demand of the staples. This is different with a middle income earner that treats the family to one vacation per year and maybe has one car. When the middle income earner earns more income, the family can afford to be treated to more vacations and travelling and will be able to purchase more cars.

2. What are substitute goods?

Substitute goods refer to goods that can be used in place of each other to satisfy the same needs. For example the use of coca cola drink in place of Pepsi drink (Singh 2009, p. 20). Lets consider more information on goods and elasticity.

3. Define Price Elasticity of Demand?

Price elasticity of demand is the relative change in quantity demanded due to a relative change in price. It is measured between two points on the demand curve, which correspond to two different price-quantity combinations (Depken 2005, p. 74).

The formula of price elasticity of demand is given below:

Proportionate change in quantity (% ∆Q)

----------------------------- -----

Proportionate change in price (% ∆P)

Adapted from (McPake & Normand 2008, p. 21).

4. List and define atleast 3 types of Elasticity

When considering goods and elasticity in Economics, the 3 popular types of elasticities are (i) cross elasticity (ii) price elasticity and (iii) income elasticity (Sloman 2006).

  • Cross elasticity- This is the percentage change in the demand of one commodity as a result of the percentage change in price of another commodity (Duta 2006, p. 39).
  • Price elasticity - This is the responsiveness of change in demand due to change in price (Sheela 2002, p. 91).
  • Income Elasticity - Is the ratio of percentage change in the quantity of a product bought, per unit of time to a percentage change in the income of a consumer (Duta 2006, p. 39).
  • 

Summarily, studies on economic goods and elasticity are topics that are intertwined in economics and a good understanding of the topics will lay the groundwork for understanding economic arguments in other courses.

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References

Depken, C 2005, Microeconomics Demystified, McGraw-Hill Professional Publishing, Blacklick, OH, USA.

Dutta, S (2006), Introductory Economics (Micro and Macro) For Class xII, New Age International, India.

McPake, B & Normand, C 2008, Health Economics an international Perspective, (2nd edn), Routledge Taylor & Francis Group, London.

Sheela, A,M (2002), Economics of Hotel Management, New Age International, Daryaganj, India.

Singh, M,K (2009) Industrial Economics and Principles of Management, New Age International, India.


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