Please categorize the following products with regard to price elasticity of dema
ID: 1139747 • Letter: P
Question
Please categorize the following products with regard to price elasticity of demand (elastic versus inelastic) and give a brief explanation for each demand (look at the lecture on the factors that help determine the price elasticity of demand.) The demands for these products have different income elasticity as well. Please categorize them with regard to income elasticity (inferior, normal, necessity or luxury goods). Please provide a brief explanation. Products: Steak Toothpaste (not about the brands) Fast food Pedicures New vehicles Used vehicles Laptop computers Lawn-care service Milk (not about the brands) Gasoline Cigarettes Lottery tickets
Explanation / Answer
Answer- Elasticity of demand refers to the change in the quantity demanded of a certain product or service when there are change in factors such as income, price of the good or service etc. If quanty changes due to change is income it is called income elasticity and when it changes because of change in price then it is called price elasticy.
It can be calculated as %change in quantity demanded of a good or service upon % change in income/price
Following are the price elaticity of the products mentioned-
1) Steak-It is considered as a normal good. In case of Normal goods the demand increases with rise in income level and vice versa. Steak is a meat and is more expensive than vegetarian foods. Thus, non vegetarian people consume it more with rising level of income and would rely less on vegetarian foods in that situation. And hence it is an elastic product as even a slight increase in it's price would lead to fall in it's demand.
2) Toothpaste- It is considered as a necessity. Necessary goods are those whose demand do not change even if income level rises or falls as they are considered necessary for human beings. Toothpaste is a good used for clensing of teeth and cannot be ignored. Hence, it's price elasticity is inelastic.
3) Fast Food- Fast foods are considered as normal goods whose demand rises with increase in income level and vice versa. Since they are not a necessity as well as a luxury. Hence their price elasticity of demand is elastic and thus qty. demanded changes with change in price.
4) Pedicures- It is considered as a luxury as even if it is not used the life of a person doesn't gets affected. but when people get pedicures done they enhance the value of their life and hence it's demand is elastic and changes very much even with a slight change in the price.
5) New vehicles- They are considerd as a normal goods because they are used by mostly all the people from low income level to high income level and thus their price elasticity is also elastic. Poeple with sufficient income level buy new vehicles and thus is a normal good. This also makes it's price elasticty elastic.
6) Used Vehicles- They are inferior goods as it is purchased when people can't afford new cars and are purchased by people with moderate income level and their demand rises with increase in income level.Hence, their demand is also elastic and changes with the change in price level.
7) Laptop and computers- Laptops are expensive as compared to computers and thus are luxury goods while on the other hand computers are normal goods because of their price level and affordability by people. Both the goods have elastic price elasticity and hence their qty. demanded changes with a change in the price level.
8) Lawn care service- Not many people can afford such service and thus it is considered as a luxury. An increase in it's price can lead to a fall in in it's qty. demanded and thus it is elastic.
9) Milk- It is a necessity as it is needed by the body for development of bones and is considerd in the staple diet. Thus, even if it's price changes the qty. demanded won't get affected and hence it inelastic.
10) Gasoline- New or used cars need it to run and thus even if it's price increases withou any increase in the income level the qty demanded won't get affected. So, it is a necessity and also it's demand is inelastic.
11) Cigarettes- It is an additional good that people consume for their self satisfaction and hence it is a luxury good. An increase in it's price would lead to fall in it's demand and hence it is elastic.
12)Lottery tickets- These goods are normal goods and hence their demand rises with rise in income level as people will want to buy more lottery ticlets. Also, this proves it's demand to be elastic.