The Elasticity of Demand-Free-Samples for Students-Myassignment

Questions: 1.Explain the Concept of the Price elasticity of demand and provide examples where understanding the nature of the price elasticity of demand has been important in the decision making of a firm. 2.Explain the Concepts of Comparative advantage and absolute advantage and provide examples of situations in which countries have ignored the Principle of Comparative advantage to their cost. Answers: 1.Introduction The elasticity of demand is one of the key important concepts in economics and plays significant role in the decision making of firm. Price elasticity of demand capture changes in the demand with respect to the price both expressed in the percentage term. The discussion focuses on the price elasticity of demand and its influence on firms decision. Analysis Demand elasticity reflects the responsiveness of demand with respect to prices. The degree of changes in demand is not same for all goods. Demand changes not only in response to its own price but also for changes in the related products such as complement or substitute goods. When demand changes in response to own price then it is known as own price elasticity (Nicholson Snyder, 2014). When demand responses to its related product then it is known as cross price elasticity. For firms it is important to know the degree demand responsiveness. Revenue of firm depends on both price and quantity sold. Therefore, whether increase or decrease in price is beneficial for a firm depends on the elasticity of the commodity. For elastic demand reduction a low price is beneficial while for inelastic demand price increase raises firms revenue (Imbs Mejean, 2015). Using this principle monopolist determines their discrimination strategy. In the inelastic market a high price is charged and in elastic market a low price is charged. Conclusion The discussion shows demand elasticity is crucial for firms pricing decision. The concept is applied for price discrimination behaviour of the monopolist. Whether to charge a low price or high price that depend on the price elasticity. 2.Introduction Absolute and comparative advantages are two fundamental theories of international trade. Absolute advantage based on absolute cost of producing goods. The concept of opportunity cost is involved in determining comparative advantage. These two theories are discussed and country specific example is given to identify situation where comparative advantage is avoided. Analysis No countries are self sufficient. Goods and services are exchanged between countries to meet demand. Countries specialized in goods n which they have absolute or comparative advantage. Absolute advantage is defined when one country using the same amount of factor input can produce more goods than its trading partner (Caselli et al., 2015). Then the country specializes in production of this good and exports it. While the country imports the goods in which the trading partner enjoys an absolute advantage. When specialization cannot be identified with absolute advantage then the theory of comparative advantage is used. A country is said to have comparative advantage when it is able to produce one good at a lower opportunity cost than other. One country may have absolute advantage in both goods and this makes application of absolute advantage limited. However, comparative advantage clearly determines specialization. Countries do not always use their comparative advantage. There are situation where countries ignore such advantage. One such country is Japan. Despite having comparative advantage in technical commodities Japan adapts protectionism policy (Ito et al., 2015). The policy believes to bring success for Japanese economy and hence avoid comparative advantage. Conclusion Theories of absolute and comparative advantage are two primary trade theories. Japan shows an exception where country ignores its comparative advantage. References Caselli, F., Koren, M., Lisicky, M., Tenreyro, S. (2015).Diversification through trade(No. w21498). National Bureau of Economic Research. Imbs, J., Mejean, I. (2015). Elasticity optimism.American Economic Journal: Macroeconomics,7(3), 43-83. Ito, B., Mukunoki, H., Tomiura, E., Wakasugi, R. (2015).Trade policy preferences and cross-regional differences: Evidence from individual-level data of Japan. RIETI Discussion Paper Series 15-E-003. Research Institute of Economy, Trade and Industry. Nicholson, W., Snyder, C. M. (2014).Intermediate microeconomics and its application. Cengage Learning.