Sarah has $100 to spend each month on bread and chicken.

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Price Elasticity of Demand for a Sweater from Banana Republic

  Let's apply these factors to a sweater from Banana Republic:

• Availability of Close Substitutes: Demand for a Banana Republic sweater would likely be elastic due to the high availability of close substitutes. Consumers can find similar sweaters at a wide range of other retailers, from fast fashion stores (Zara, H&M) to department stores (Macy's, Nordstrom) and other premium brands. If Banana Republic raises its prices significantly, many consumers would simply switch to a competitor offering a similar style or quality at a lower price.
• Necessity vs. Luxury: A sweater, particularly from a brand like Banana Republic (which is generally considered a mid-to-high-end fashion retailer), is largely a luxury item rather than a necessity. While clothing is a necessity, a specific brand of sweater is not. Consumers can easily delay purchasing a new sweater or opt for a less expensive alternative if the price at Banana Republic becomes too high. This further contributes to more elastic demand.
• Proportion of Income Spent on the Good: For most consumers, a single sweater, even from Banana Republic, represents a relatively small proportion of their overall income. While a $100+ sweater isn't insignificant, it's not a major budget item like a car or housing. However, because there are so many substitutes and it's a luxury, consumers are still price-sensitive. If the price became exorbitant, it could become a larger proportion of discretionary income, pushing demand towards more elasticity. But generally, its impact on income contributes to its elasticity when combined with the other two factors.

Considering all three factors, the demand for a sweater from Banana Republic would generally be considered elastic.

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Justin Bieber Exercise Video Elasticity of Demand

  To calculate the elasticity of demand, we use the midpoint formula: Ed​=(P2​+P1​)/2P2​−P1​​(Q2​+Q1​)/2Q2​−Q1​​​ Where: P1​=$20 P2​=$30 Q1​=100,000 subscriptions Q2​=60,000 subscriptions Step 1: Calculate the percentage change in quantity demanded. (60,000+100,000)/260,000−100,000​=160,000/2−40,000​=80,000−40,000​=−0.5 Step 2: Calculate the percentage change in price. ($30+$20)/2$30−$20​=$50/2$10​=$25$10​=0.4 Step 3: Calculate the elasticity of demand. Ed​=0.4−0.5​=−1.25 The absolute value of the elasticity of demand is 1.25. Is this demand elastic or inelastic? Since the absolute value of the elasticity of demand (1.25) is greater than 1, the demand for Justin Bieber's exercise video is elastic between these two points.

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Johnny's Income Elasticity of Demand for Sushi

  Income elasticity of demand measures the responsiveness of the quantity demanded for a good to a change in income. The midpoint formula is also appropriate here: Ei​=(I2​+I1​)/2I2​−I1​​(Q2​+Q1​)/2Q2​−Q1​​​ Where: I1​=$2,500 I2​=$3,500 Q1​=3 times per month Q2​=7 times per month Step 1: Calculate the percentage change in quantity demanded. (7+3)/27−3​=10/24​=54​=0.8 Step 2: Calculate the percentage change in income. ($3,500+$2,500)/2$3,500−$2,500​=$6,000/2$1,000​=$3,000$1,000​=0.3333... Step 3: Calculate Johnny's income elasticity of demand for sushi. Ei​=0.3333...0.8​=2.4 For Johnny, is sushi 1) a normal good or an inferior good, and 2) a necessity or a luxury?

1. Normal good or inferior good? Since Johnny's income elasticity of demand for sushi is positive (2.4), sushi is a normal good for him. This means that as his income increases, his demand for sushi also increases.
2. Necessity or luxury? Since Johnny's income elasticity of demand for sushi is greater than 1 (2.4 > 1), sushi is a luxury good for him. This indicates that as his income increases, his demand for sushi increases by a proportionally larger amount. He's not just buying more because he can afford it; he's significantly increasing his consumption as his disposable income rises.

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Netflix and HCCCtinder Cross-Price Elasticity of Demand

  Cross-price elasticity of demand measures the responsiveness of the quantity demanded for one good to a change in the price of another good.

Sample Answer

       

Factors Determining Price Elasticity of Demand

  Three key factors help determine how elastic demand for a particular good is:

1. Availability of Close Substitutes: This is perhaps the most significant factor. If there are many readily available alternatives for a good, consumers can easily switch to a different product if the price of the original good increases. This makes demand more elastic. Conversely, if there are few or no close substitutes, consumers have fewer options, and demand tends to be more inelastic.
2. Necessity vs. Luxury: Goods considered necessities (e.g., basic food items, essential medicines) tend to have more inelastic demand because consumers will continue to purchase them even if prices rise significantly, as they are crucial for survival or daily functioning. Luxury goods, on the other hand, are non-essential items. Their demand tends to be more elastic because consumers can easily forgo them if their prices increase.
3. Proportion of Income Spent on the Good: If a good represents a large portion of a consumer's budget, a price change will have a more noticeable impact on their purchasing power. This makes demand more elastic. For example, a 10% increase in the price of a car (a large expenditure) will likely have a greater impact on demand than a 10% increase in the price of a chewing gum (a small expenditure).