What do you understand by the own-price elasticity of demand for a good?

What do you understand by the own-price elasticity of demand for a good?

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What do you understand by the own-price elasticity of demand for a good?

1. (a) What do you understand by the own-price elasticity of demand
for a good?

(b) Will a linear (straight line) demand curve have a constant
own-price elasticity of demand? Explain your answer.

(c) Following the terrorists attacks in the USA on 11 September, there
was a marked fall in business travel. In respomse, many hotels cut
their prices to business travellers; for example the Hyatt Hotel group
offered discounts of up to 50 per cent off regular room rates. Under
what circumstances would this lead to increased revenue for these
hotels?

Before we define the meaning of the own-price elasticity for a good we
must understand elasticity and its concept in general. Elasticity is
basically a comparison between the sizes of change in the quantity
demanded, in the case of the own-price elasticity, of a certain good
and in the variable that caused this change. According to Mankiwelasticity
is a measure of the responsiveness of quantity demanded or quantity
supplied to one of its determinants. The law of demand implies that an
increase in a price of a good will subsequently lead to a fall in the
quantity demanded for that good. The formulae which calculates this
amount is the division of the percentage of change in quantity
demanded by the percentage of change in price. The sign of price
elasticity of demand, and elasticity as well, is always going to be
negative due to the fact that quantity and price demanded are usually
in opposite directions. Elasticity is going to be negative as well
since neither the percentage change in price nor the the percentage
change in quantity ar...


... middle of paper ...


...sequent repurcusion this had in economy
as a whole brought a downfall in business travelling. The hotels in
order to manage this crisis effectively reduced their prices and
offered discounts in order to increase the quantity of customers
visiting them. If we consider the law of demand in this case, hotel
reservations should increase in this period as well as the total
revenue of the business but this would happen when the price
elasticity of demand is elastic. This happens when the percentage
change in quantity is larger than the percentage change in price.

Concluding, we would easily say that it is assume that the hotels
would increase their total revenue with discounts and better prices
but this is not always the case. There are other factors influencing
customer behaviour after these terrorist attacks that would not be
easily predicted or affluenced.

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