Answer to Question #320171 in Macroeconomics for dheeraj

Question

Explain the concepts of Price Elasticity of Demand, Income Elasticity of

Demand and Cross-Elasticity of Demand. (10 marks)

(b) To what extent are these concepts useful to:- managers of shopping malls, and a government (20 marks)

3. Discuss the effectiveness of fiscal and monetary policies in regulating economic

Answer 1

A)

i) The concept of price elasticity of demand is used to measure responsive consumers are to changes in the price of a commodity's own price.

ii) Income elasticity, measures the degree of responsiveness of quantity demanded to a change in money income.

iii) Cross elasticity is used to measure the quantitative responsiveness of demand for a good when the price of another commodity changes.

B) The study of price,income and cross elasticities helps various governments, managers to know how consumers will respond to their goods or services when there is a change in price of their commodity, the income of the consumers, or the price of another commodity. For governments, the study of elasticity helps them to know how to tax a particular commodity. Whether to classify it as an elastic or inelastic good. For managers of shopping malls, understanding how consumers react to their commodity will help them understand their own revenue structure adequately since goods with more elastic demands tend to be volatile with a price increase while inelastic goods can absorb any shock in price change or government policies.

C) Fiscal and monetary policies help to ensure that the economy is moving in the right direction or doing well. Both are used to help the economy recover or prevent such occurrences as inflation, recession and unemployment. A good fiscal policy helps to keep the spending at a minimal, hence controls inflation and also unemployment.