Competency 309.1.2 Supply and Demand Task 2

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Competency 309.1.2: Supply and Demand A. Elasticity of Demand as it relates to Elastic, Unit, and Inelastic Demand. Elasticity of demand is a way to measure how a price change of a unit will affect the overall desire for a consumer to purchase that unit. There are three ways that a price change can affect the demand of a product, it can increase demand, decrease demand, or not affect demand at all. (McConnell, Brue, & Flynn, 2012) Elastic Demand is when a price change directly effects a dramatic change in demand, most commonly in the opposite direction of the price change. Unit Demand is when a price change and consumer demand change together in the same direction. Inelastic Demand occurs when a price change has little effect on the end consumer’s demand. Example of Elasticity of Demand: Company A sells product qwerty at $10.00 per unit. The company generally sells 100 units per week, generating a revenue of $1000.00 per week. Company A decided to lower the price of product qwerty to $5.00. This change resulted in 250 product qwerty being purchased the next week resulting in a revenue increase of $250.00. Demand more than doubled as price went down. This dramatic change tells us the demand is elastic. If in this example less than 200 units would have been purchased the revenue would have been less than the revenue before the price change signifying that while demand increased when price went down, it did not increase enough to take the demand category out of inelastic demand. If 200 units exactly were sold due to the price change, no increase or decrease in revenue would be experienced therefore the category that would fall in would be unit demand. B. Cross Price Elasticity as it relates to Substitute Goods and Complementary Goods. Cross Price Elasticity is the effect of a price change of a different product or a product that is

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