MCLKT
offlineMember
BEC MCQ #10 pg143 in 2011 Wiley book.
Demand for a product tends to be price inelastic if:
a. the product is considered a luxury item
b. few good complements for the product are available
c. the population in the market area is large
d. people spnd a large share of their income on the product.
MCLKT
offlineMember
My thoughts
a. luxury items are elastic
b. substitutes, not complements will have effect
c. I don't know the effect of large population???
d. items consumers spend large portion of income are Elastic
Wile says D is correct because: price inelasticity means that the quantity demanded does not change much with price changes. This would b e a characteristic of a good with few substitutes.
Could someone please explain?
Herbieherb
offlineMember
If people spend a large % of their income on a product it must be necessary and inelastic. I would think it would be something like tuition or cpa review exam materials. While I was studying bec that's the logic I used
BaseballCPA
offlineMember
Yeah, what Roach said is a perfect example; in fact, it is the standard example used in every economics class to explain demand inelasticity. "In the short-run, a diabetic will continue to demand the same quantity of insulin, regardless of the price, etc. etc. etc.". So if price elasticity of demand is: (%change in Qd / %change in P), then something where people are spending a large portion of their income is likely to not be a luxury item (i.e. a necessity), for which their demand is not sensitive to price. I think your thought processes of why the other answers were incorrect was accurate and logical. You seem to be on the right track...I hope you do well!
MCLKT
offlineMember
Thanks for the feedback. I feel like I have a good grip on the price elasticity of demand and interpreting the coeffecient.
But I think Wiley has contradicting information. Pg 116/117 of the text book states "the elasticity of demand is greater for a product when ...a larger proportion of income is spent on the good".
Which makes sense to me. using Herbie's ex: of CPA materials I would think of this as elastic. If the price of yaeger goes up dramatically, it would then lose a portion of market share, and demand would most likely decrease. I know I would or I would use a more reasonable option.
When I think of items that consumers spend a large portion of their income on I think housing, vehicle...items that tend to have substitutes.These are elastic. I think??? I mean logically, if you spend a larger portion of your income on the item, and the price increases... how can you spend more?
I don't think the "insulin" example would apply. I understand it is inelastic, and the reasoning behind it. But I don't think that is what they mean by " a large portion of income".
I'm testing on Wednesday!!!!
That one review question just thew me for a loop. I'm on to Risk Mng't final review now.
Thanks again!
PhDCPA
offlineMember
What is the source of the question? I didn't use Wiley, but with Bisk and Gleim I stopped even doing questions that were created by the "editor" because I found that those questions were oftentimes poorly worded, ambiguous, had more than one correct answer, or had the wrong answer listed as correct.
Yvonne570
offlineMember
Demand for a product tends to be price inelastic if:
a. the product is considered a luxury item
b. few good complements for the product are available
c. the population in the market area is large
d. people spnd a large share of their income on the product
Trick question, and a great reminder to be careful because this one got me as well. It's ruling out all alternatives:
A: Luxury item (elastic demand)
B: complements have more to do with other products to use with this one. It's not the same as substitutes (that's the catch).
C: Population that is large doesn't influence this (formula uses quantity and income)
D: As what previous comments mentioned above - I agree a large share of income allocated towards a product would result in a greater need for the product. Below are some additional notes:
A. Factors Affecting Demand Elasticity
There are three main factors that influence a demand's price elasticity:
1. The availability of substitutes - This is probably the most important factor influencing the elasticity of a good or service. In general, the more substitutes, the more elastic the demand will be. For example, if the price of a cup of coffee went up by $0.25, consumers could replace their morning caffeine with a cup of tea. This means that coffee is an elastic good because a raise in price will cause a large decrease in demand as consumers start buying more tea instead of coffee.
However, if the price of caffeine were to go up as a whole, we would probably see little change in the consumption of coffee or tea because there are few substitutes for caffeine. Most people are not willing to give up their morning cup of caffeine no matter what the price. We would say, therefore, that caffeine is an inelastic product because of its lack of substitutes. Thus, while a product within an industry is elastic due to the availability of substitutes, the industry itself tends to be inelastic. Usually, unique goods such as diamonds are inelastic because they have few if any substitutes.
2. Amount of income available to spend on the good - This factor affecting demand elasticity refers to the total a person can spend on a particular good or service. Thus, if the price of a can of Coke goes up from $0.50 to $1 and income stays the same, the income that is available to spend on coke, which is $2, is now enough for only two rather than four cans of Coke. In other words, the consumer is forced to reduce his or her demand of Coke. Thus if there is an increase in price and no change in the amount of income available to spend on the good, there will be an elastic reaction in demand; demand will be sensitive to a change in price if there is no change in income.
3. Time - The third influential factor is time. If the price of cigarettes goes up $2 per pack, a smoker with very few available substitutes will most likely continue buying his or her daily cigarettes. This means that tobacco is inelastic because the change in price will not have a significant influence on the quantity demanded. However, if that smoker finds that he or she cannot afford to spend the extra $2 per day and begins to kick the habit over a period of time, the price elasticity of cigarettes for that consumer becomes elastic in the long run.
Read more: http://www.investopedia.com/university/economics/economics4.asp#ixzz1iHvhkxIA
MCLKT
offlineMember
Yvonne, thank you! I think looking at the industry as a whole would validate this answer. A large portion of my income is spent on coffe ;) but, if my Carribou Coffee price goes up, I'll switch (Elastic). But if the caffeine goes up (the real reason I consume) and the entire coffee industry price increases, I would pay the higher price, no matter what (Inelastic).
Finally, it clicks!
Thank you :)
Yvonne570
offlineMember
Glad it makes sense. Sometimes the review programs give us the "basics" without elaborating, then leading us to pull out our Econ books to fully remember the concepts, which is a requirement in this case.
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