Effect of Price Elasticity on Demand-Free-Samples for Students

Questions: 1.Discuss how Price of a Product directly affects its Demand. 2.Discuss about the Absolute advantage and Comparative advantage theories. Answers: 1.Price of a product directly affects its demand. The extent of this effect is captured by price elasticity of demand. Change in demand proportion due to change in price is defined as price elasticity of demand. Therefore, the information of demand elasticity guides the producer to determine price of the concerned product. Producers involve in production activity with a profit motive. Revenue, which is the product of price and quantity, depends on demand elasticity. The elasticity affects differently to a producer operating in competitive market and those operating in imperfect competitive market. In case, the producer sells the product in competitive market setting a high price highly reduces demand for the product because of availability of close substitute (Mankiw, 2014).. On the other hand, monopolist seller benefitted from charging high price for product having low elasticity. Elasticity also differs depending on classification of the product. Products counted as necessary product are inelastic in nature. Therefore, changing price does not affect revenue and profitability. Luxury items are highly elastic nature. Hence, policy of a price decrease benefits the producers by a greater proportionate increase in sales volume. In a linear demand curve, there is portion where demand is elastic, inelastic and unit elastic. If the demand for the product is elastic then total revenue decreases with increase in output volume. In case of inelastic demand, revenue moves in line with output. That is if output decreases then revenue also decreases (Esteves Reggiani, 2014). For unit elastic demand no change in total revenue is realized even when output changes. 2.In international trade, two important theories are absolute advantage and comparative advantage theories. Adam Smith pioneers the first one while David Ricardo pioneered the second. Before the evaluation of comparative advantage, countries specialized depending on their absolute advantages. Absolute advantage measures productive efficiency. Between two countries, the country that can produce more goods using fewer amounts of resources in absolute term is said to have absolute advantage in that good. While comparative advantage is determined by considering the amount of goods, have to be sacrificed to produce one good. Greater the amount of sacrificed good greater is the opportunity cost (Gilpin, 2016). In comparative advantage theory, country specializes in good in which it has a lower opportunity cost. Productive resources are more important in absolute advantage while opportunity cost is important in comparative advantage theory. Comparative advantage illustrates the capacity of one country to produce one good in an efficient way than other. It usually compares countries production output for similar kind of goods or services. A country has absolute advantage if it is able to produce greater amount of goods and services when same resources are made available to them Comparative advantage takes into consideration overall level of production of a country in given time as contrast to absolute advantage (Hanson, Lind Muendler, 2015). Absolute advantage can capture output of multiple goods but not overall production. Unlike absolute advantage notion of mutual benefit is involved in comparative advantage. Because of a detailed analysis of ability of nations, comparative advantage is a more acceptable theory in international trade. References Esteves, R. B., Reggiani, C. (2014). Elasticity of demand and behaviour-based price discrimination.International Journal of Industrial Organization,32, 46-56. Gilpin, R. (2016).The political economy of international relations. Princeton University Press. Hanson, G. H., Lind, N., Muendler, M. A. (2015).The dynamics of comparative advantage(No. w21753). National bureau of economic research. Mankiw, N. G. (2014).Essentials of economics. Cengage learning.