Business Economics for Price Elasticity of Demand- myassignmenthelp

Question: Discuss about theBusiness Economics for Price Elasticity of Demand. Answer: Price elasticity of demand: Price elasticity of demand is a mechanism of microeconomics to capture consumers degree of responsiveness to changes in price. As per the law of demand, fall in price boosts the demand and increase in price reduces the quantity demanded. The lower the price, greater is the purchasing power of consumers out of a given income. Elasticity reflects the direction and intensity of changes in quantity demanded for one unit change in price (Fisher Shell, 2014). Elasticity contains negative sign for negative relation between price and demand with exception in cases like Giffen goods that reflects positive relation between price and quantity. Elasticity is defined as: Ed = Types of elasticity depend upon value of E. E1 implies for unit change in price there would be less than one unit change in demand. This is inelastic demand. E=0, implies perfectly inelastic demand that refers to percentage change in quantity demanded is zero for one unit increase in price. For E=1, indicates unitary elastic demand where the quantity demand rises just by 1 unit for unit fall in price Elastic demand denoted by E1 implies change in quantity demand by more than one unit for unit change in price (Hall Lieberman, 2012). If a firm say Apple wants to raise its product price it must know how inelastic or elastic the demand would be in favor or against of the price change. Generally, high priced apple gadgets fall in luxurious good category that faces elastic demand. So increase in price would reduce quantity substantially, which wont be good for the profit of company. Absolute Comparative Advantage Driving concept behind international trade is absolute advantage. This refers to advantage nation has in domestic production in terms of labor capability. Labor is the only input in production under the concept. Lesser the amount of labor required to produce one unit of goods, higher is the productivity and greater is the advantage the nation tend to have. This cross-country difference in productivity of labor, nations follow production in one sector that is more advantageous to produce and lead toward specialization (Levchenko Zhang, 2016). Specialization propels trade that further pushes exchanging for goods and services produced by other nation with the own production. The concept of comparative advantage revolves around the theory of opportunity cost. This refers to the amount of foregone production in one sector for one unit production in another sector (Laursen, 2015). Suppose in country A, to produce one unit of food, 2 unit of machine production has to be forgiven and to produce one unit of machine goods, 0.5 unit of food production. In country B, , to produce one unit of food, 1.5 unit of machine production has to be forgiven and one unit of machine production requires 2.5 unit of food production to be forgive. Evidently, machine production requires less sacrifice of food in Country A and Country B has lesser opportunity cost in food production indicating A would specialize in machine production and B in food production and they exchange through trade. Reference: Fisher, F. M., Shell, K. (2014).The Economic Theory of Price Indices: Two Essays on the Effects of Taste, Quality, and Technological Change. Academic Press. Hall, R. E., Lieberman, M. (2012).Microeconomics: Principles and applications. Cengage Learning. Laursen, K. (2015). Revealed comparative advantage and the alternatives as measures of international specialization.Eurasian Business Review,5(1), 99-115. Levchenko, A. A., Zhang, J. (2016). The evolution of comparative advantage: Measurement and welfare implications.Journal of Monetary Economics,78, 96-111.