Phenomenon of Price Elasticity of Demand-Samples for Students

Questions: 1.Explain the Concept of the Price Elasticity of demand and provide examples where understanding the nature of the Price Elasticity of demand has been important in the decision making of a firm. 2.Explain the Concepts of Comparative advantage and absolute advantage and provide examples of situations in which countries have ignored the principle of comparative advantage to their cost. Answers: 1.Introduction In the price and output decision making of a firm, several economic factors play immensely important roles, especially for augmenting the efficiency of the firms as well as in their long term profitability and sustainability. One of such attributes is the price elasticity of demand, which shows the degree of responsiveness of the demand of a commodity or service with respect to the change in the price of the same. The assignment takes into account this economic aspect and the implication of the same on the decision-making perspectives of the firms (Ekelund Jr Hbert, 2013). Analysis The price elasticity of demand may be of two types, own price elasticity and cross price elasticity, with the former showing the relation of the demand for a commodity with its own price and the latter showing the relation of demand for the same with the price of substitutes and complements. The elasticity of demand therefore shows the nature and flexibility of demand for the same commodity in concern. The firms, in real economic scenario, often base their decisions of production and pricing on the basis of the price elasticity of demand. One such example is the practice of charging different prices in different markets with difference in elasticity of demand, which is especially true in monopolistic market and is known as price discrimination (Varian, 2014). Figure 1: Price Discrimination in the Monopoly Market (Source: As created by the author) The above figure shows the phenomenon of price discrimination, in which the firms take advantage of the difference in price elasticity in different markets, especially the geographically distant ones and charge different prices according to the elasticity of demand. Conclusion From the above discussion, it can be concluded that the phenomenon of price elasticity of demand is one of the immensely significant factors in the decision making perspective of the firms in an economy. 2.Introduction The two most significant theories prevailing in the international trade scenarios are the theories of absolute advantage and that of comparative advantage in trade, the latter one being more feasible and practically applicable in the real case scenarios. The assignment tries to analyze these theoretical frameworks and discusses the real cases of exceptions. Analysis Adam Smith first proposed the absolute advantage theory. According to the assertions of this theory the countries need to produce and trade those commodities in which they have absolute productive advantages than their trading partners, that is which they can produce using lesser amount of resources. However, this theory failed to give any solution with respect to trade, in those instances where between the two trading partners; one country enjoys absolute advantage in all the commodities over the other. The theory of Comparative Advantage, as proposed by David Ricardo, in this context gives a solution by asserting that the countries should produce and export only those commodities in the production of which the opportunity cost of production is lesser than its trading countries, to gain efficiencies and profitability in international trade scenario (Cuat Melitz, 2012). However, in Japan, in spite of the presence of huge comparative advantage in production of technological goods, Japan do not use this for trading purposes as they believe that protectionism has been their core principle of success and utilizing the comparative advantage will actually make them more exposed to unfair global competitive politics (Nunn Trefler, 2013). Conclusion Thus, it can be seen that though comparative advantage theory is one of the most applicable trade theories currently existing, in few situations several countries do not utilize their competitive advantages in order to preserve their welfare. References Cuat, A., Melitz, M. J. (2012). Volatility, labor market flexibility, and the pattern of comparative advantage.Journal of the European Economic Association,10(2), 225-254. Ekelund Jr, R. B., Hbert, R. F. (2013).A history of economics theory and method. Waveland Press Nunn, N., Trefler, D. (2013).Domestic institutions as a source of comparative advantage(No. w18851). National Bureau of Economics Research. Varian, H. R. (2014).Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton Company