The economic concepts founded in Will Bury’s Price Elasticity Scenario are the following: 1. Supply and Demand One of the most fundamental concepts of economics and the backbone of a market economy is the concept of supply and demand. Demand shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time. (McConnell & Brue, 2004) The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. Therefore, there is a negative relationship between price and quantity demanded.
The basic determinants of demand which affect purchases are: •Consumers’ preferences •The number of consumers in the market •Consumers’ incomes •The price of related goods •Consumers’ expectations about future prices and incomes Supply shows the amount of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specific period. (McConnell & Brue, 2004) The law of supply states that as price rises, the quantity supplied rises; as price falls, the quantity supplied falls. Therefore, there is a positive relationship between price and quantity supplied.
The basic determinants of supply are: •Resource price •Technology •Taxes and subsides •Prices of other goods •Price expectation •The number of sellers in the market In order to understand the effect of price on volume demanded, Will Bury must understand the theory of supply and demand. When he will put these two concepts together, he will identify the market equilibrium with the price and quantity at the intersection of the demand and supply relations. That will be the price just high enough that quantity demanded is equal to quantity supplied, and the quantity corresponding to that price. 2. Elasticity of Demand and Supply
The degree to which a demand or supply reacts to a price change is measured by a product’s price elasticity. There are different types of elasticity. Price elasticity of demand measures how sensitive is the quantity demanded to a change in the price of the good. Price elasticity of supply measures how sensitive is the quantity supplied to a change in the price of the good. When elasticity is small (less than 1 in absolute value) the relation is inelastic. Inelastic demand (supply) means that the quantity demanded (supplied) is not very sensitive to the price. When elasticity is large (greater than 1 in absolute value) the relation is elastic.
Elastic demand (supply) means that the quantity demanded (supplied) is sensitive to the price. General formula for price elasticity is: Elasticity = (Percentage Change in Quantity) / (Percentage Change in Price) As a general rule, the more substitutes a good has, the more elastic is its supply and demand. 3. Substitute Goods Substitute goods are goods that can be used to satisfy the same needs, one in the place of another. That means that demand for the two kinds of goods will be bounded together by the fact that consumers can trade of one good for the other if it becomes advantageous to do so.
In Will Bury’s Price Elasticity Scenario the 500-page book on CD is a substitute for Bury’s audio files of a book, therefore Will Bury must stay current on marketing research and stay current on other potential competitors who may offer substitute products because an increase in price for one kind of goods will result in an increase in demand for its substitute goods, and a decrease in price will result in a decrease in demand for its substitute. 4. Cross Elasticity of Demand The cross elasticity of demand measures how sensitive consumer purchases of one product are to a change in the price of some other product.
The general formula for cross elasticity of demand is: Exy = (Percentage Change in Quantity Demanded of Product X) / (Percentage Change in Price of Product Y) The cross elasticity of demand for substitute goods will always be positive, because the demand for one good will increase if the price for the other good increases. References: McConnell, C. R. , & Brue, S. L. (2004). Economics: Principles, Problems, and Policies (16th ed. ). New York: McGraw Hill/Irwin University of Phoenix Material: Will Bury’s Price Elasticity Scenario. Retrieved June 6, 2009 from: https://ecampus. phoenix. edu/classroom/ic/classroom. aspx