ASSIGNMENT TWO

Assignment Two

Assignment Two

Question 1

The following table shows price (PD) and income elasticity (YD) for vegetables and catering services:

PDYD

Vegetables-0.170.87

Catering Services-2.611.64

Using the figures given for both PD and YD, explain whether vegetable is a luxury or a necessity.

Answer:

The price elasticity of demand is an indicator or predictor of proven demand response faced with a price change. The price elasticity corresponds to the relative variation of the quantity demand with respect to changes in the relative prices level of the product (Lehman, 2007). The price elasticity is normally negative because the demand or consumption falls when prices rise. This is represented as 0 < Elasticity < -1 that indicates a low price sensitivity (Wilkinson, 2005). The price elasticity is a key element to consider in connection with the pricing policy. Similarly, income elasticity represent the viable change in the quantity demanded level based on the product properties, such as whether it is characterized as necessity or luxury by the customer (McConnell, 2011). This is highly influenced by changes in the income level of a person. Income elasticity of less than one shows that the product is characterized as normal/necessity good by the customer.

Vegetables have inelastic demand since price elasticity for vegetable equal -0.17, which is below one. This shows that irrespective of increase in the prices level, only a minute change will occur in the quantity demanded decrease of vegetable products. This concept has also been proven by the income elasticity of the demand, which is below one. This shows that for one unit change in the income level, demand of vegetable will increase only by one unit. This shows that vegetables are normal/necessity products.

Using the figures for both PD and YD, explain whether catering services is a luxury or a necessity.

Catering service has elastic demand since price elasticity for catering services equal -2.61. Ignoring the negative sign, absolute figure of price elasticity shows that the product is highly elastic in nature. Price elasticity of more than one shows that catering services are categorized as luxury services, which shows a notable change in demand with respect to change in price (McConnell, 2011). If prices increase by one unit, demand for catering services reduces by 2.61 units, which shows that it is not a necessity product. This concept has also been proven by the income elasticity of the demand, which is more than one (1.64). This shows that for one unit change ...