Competency 309.1.2: Supply and Demand – The graduate applies the laws of supply and demand to develop a desirable relationship between supply and demand in a given situation.

Objective 309.1.2-08: Differentiate between elastic and inelastic demand.
Objective 309.1.2-09: Discuss the application of elastic and inelastic demand in a given marketing situation.

Introduction:

Economists use elasticity to measure consumer responsiveness to changes in the various determinants associated with demand. Elasticity addresses percentage changes, i.e., a percentage change in quantity demanded divided by a percentage change in (own price, the price of another good, or income). Understanding elasticity is important to businesses and policy makers alike as they consider how a potential change will impact markets when consumers adjust their purchasing behaviors.

Task:

A. Discuss elasticity of demand as it pertains to elastic, unit, and inelastic demand.

B. Discuss cross price elasticity as it pertains to substitute goods and complementary goods.

C. Discuss income elasticity as it pertains to inferior goods and to normal goods (sometimes also called superior goods).

D. Use an example to discuss why demand tends to be relatively elastic in a situation where “Availability of Substitutes” exists.

E. Discuss the “Proportion of Income Devoted to a Good” concept by contrasting two products purchased.
1. Address, in your discussion, specific examples of how the same percentage change in the price of both goods affects the percentage change in the quantity demanded for each of the two goods.

F. Contrast how a person would initially respond to a relatively large increase in the price of a product in the short run as opposed to how that same person might react to that same price increase over a longer time horizon (i.e., the long run), using the “Consumer’s Time Horizon” concept.

G. Identify by price range the areas on the demand curve where demand is elastic, inelastic, and unit elastic using the attached “Graphs for Elasticity of Demand, Total Revenue.”
1. Explain the corresponding impact on total revenue for each of the three price ranges indentified in part G.

H. When you use sources, include all in-text citations and references in APA format.

Note: For definitions of terms commonly used in the rubric, see the attached Rubric Terms.

Note: When using sources to support ideas and elements in a paper or project, the submission MUST include APA formatted in-text citations with a corresponding reference list for any direct quotes or paraphrasing. It is not necessary to list sources that were consulted if they have not been quoted or paraphrased in the text of the paper or project.

Note: No more than a combined total of 30% of a submission can be directly quoted or closely paraphrased from sources, even if cited correctly.