Elasticity Case Study

Task 2

Introduction

The degree to which a demand or supply curve reacts to a change in price is the curve's elasticity (Reem Heakal, 2015). Elasticity differs between products because some products could be more important to the consumer. Products that are necessities will be more insensitive to price changes since buyers would keep on purchasing these products regardless of price increases. Alternatively, a price increase of a good or service which is regarded less of a requirement will discourage more consumers because the opportunity cost of buying the product will become too high.

A good or service will be regarded as highly elastic if a minor change in price contributes to a sharp change in the quantity demanded or supplied. Generally these types of products are commonly available

Normally, if the quantity demanded of a good is very responsive to a change in the good's price, the good is considered to be elastic (Investopedia.com, 2015). Unlike to a product, in which the quantity demanded of the good is very responsive to a change in the product's price, is an inelastic good. Goods that are inelastic show little response in the quantity demanded to a change in price (Jay Kaplan, 2002). Figure 4: The demand curve of cola

The figure 4 shows the demand curve for a good with numerous close alternatives in consumption such as soft drinks or colas. To calculate the price elasticity of demand, first analyze the result when the price of a six-pack of sodas moves from $2 to $2.20, a 10% increase in price. However, the quantity demanded falls from 1,000 to 850, a 15% decrease in the quantity demanded. The price elasticity of demand of 1.5 measured here ensures that for every 1% change in the price of cola, quantity demand changes by 1.5% and it is clearly a relatively elastic