Read the requirement carefully Essay Example | Topics and Well Written Essays - 1250 words

Read the requirement carefully - Essay Example They are also used to determine the effect competition has on certain goods. Effects of these forces can be interpreted well especially in a perfect market. A perfect market is a market that is governed by certain conditions. They are: there are no restrictions to entering the market; information about the market is readily available; there is no party in the market that has any powers to set prices and technology is equally accessed by all participants in the market, (Mankiw, 2011). The demand of a commodity is the quantity of a good or service a consumer is willing and ahs the ability to buy. The law of demand stipulates that, when there are no other factors at play, the higher the price of a good or service, the lower the demand for that good or services. For example, if the price of milk increases then the demand for milk will fall. Diagram 1.a is a simple illustration of a demand curve Diagram 1.a However, there is an exception with velben and giffen goods, (Arnold, 2008). A vel ben good is a type of commodity whose demand rises with the increase of its price. Normally giffen goods are considered commodities of position. They include jewelry, expensive cars among others. Giffen good is a commodity whose demand increases irrespective of the change in price. ... The responsiveness of the demand of goods and services to these factors is referred to as elasticity of demand. The percentage change of the quantity demanded for a particular good is referred to as price elasticity of demand. it is derived from the formulae . Diagram 1.c illustrates price elasticity of milk. Diagram 1.c An increase in the price of milk from p1 to p2 will result in a slight decrease in the quantity demanded from q1 to q2. This is because products like milk experience inelastic price elasticity. This is because the milk is a necessity good which experiences this type of elasticity, (Mankiw, 2011). Cross price elasticity of demand is the difference in the amount demanded for a good in percentage as a result of a percentage change in the price of other goods. It is derived from the formula, (Hall and Lieberman, 2007). In this case there are different types of curves to show the responsiveness of the amount demanded as a result of changes in price of other goods. Diagram 1.d shows the cross elasticity of complementary goods. These are goods that are used together. For example, milk and bread are complementary goods. If the price of bread drops from p1 to p2 then we expect the demand of milk to increase from p1 to p2. Diagram 1.d Diagram 1.e shows the cross elasticity of independent for independent goods. These are goods whose use is independent of each other, for example, milk and electronics are independent. Hence a change in the price of electronics from p2 to p1 will result in no change in the price of milk. It will remain at q1.. Diagram 1.e Income elasticity of demand is the percentage change demand of a certain commodity as a result in changes in income of the consumer. It is derived from the formula .Since milk is a