Question

Use an elasticity concept to explain each of the following observations. a. During economic booms, the number of new personal care businesses, such as gyms and tanning salons, is proportionately greater than the number of other new businesses, such as grocery stores. b. Cement is the primary building material in Mexico. After new technology makes cement cheaper to produce, the supply curve for the Mexican cement industry becomes relatively flatter. c. Some goods that were once considered luxuries, like a telephone, are now considered virtual necessities. As a result, the demand curve for telephone services has become steeper over time. d. Consumers in a less developed country like Guatemala spend proportionately more of their income on equipment for producing things at home, like sewing machines, than consumers in a more developed country like Canada.

Short answer

a. High-income elasticity for personal care businesses during economic booms. b. Increased supply elasticity due to cheaper production technology for cement. c. Demand for telephone services has become more inelastic as they changed from luxuries to necessities. d. Goods like sewing machines have lower income elasticity in less developed countries due to necessity.

Step-by-step solution

- Understanding Income Elasticity

Income elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in income. During economic booms, people have more disposable income and tend to spend more on luxury or nonessential goods, which have a higher income elasticity of demand.

- Discussing Supply Elasticity and Technology

Supply elasticity refers to how much the supply of a product changes in response to a change in the price of the product. When new technology makes production cheaper, it increases supply elasticity because firms can produce more at each price level, leading to a flatter supply curve for cement in Mexico.

- Analyzing the Demand Curve Shift Over Time

The demand curve for a product becomes steeper (more inelastic) when a good changes from being a luxury to a necessity over time. This is because as a good becomes a necessity, people are less sensitive to price changes and demand doesn't decrease significantly with a price increase.

- Comparing Consumption Patterns in Different Economies

Income elasticity of demand also varies based on the level of economic development of a country. In less developed countries like Guatemala, the proportion of income spent on production equipment is higher due to the greater necessity of self-sustenance, which implies these goods have a lower income elasticity of demand in comparison to more developed countries like Canada.

Key concepts

Supply Elasticity

Supply elasticity is a measure of how much the quantity supplied of a product changes in response to a change in its price. A key factor that affects supply elasticity is the production technology available to suppliers.

For example, when technological advancements make it cheaper to produce cement, suppliers are able to offer more cement at any given price. This scenario creates a more elastic supply because a small decrease in price due to increased production efficiency doesn't lead to a large decrease in quantity supplied. Instead, the supply curve flattens, meaning that there is a smaller change in quantity supplied for a given change in price.

• A flatter supply curve indicates a more elastic supply.
• Technological advancements often result in increased supply elasticity.
• With a higher supply elasticity, suppliers are more responsive to price changes.

Demand Curve Elasticity

Demand curve elasticity measures how sensitive the quantity demanded of a good is to a change in its price. A steeper demand curve represents a good that is more of a necessity; its demand does not change much with price fluctuations, indicating low elasticity or inelastic demand.

The transition of goods from luxury to necessity affects their demand curve elasticity. As a good, such as a telephone, becomes essential over time, its demand curve becomes steeper—consumers will continue to purchase it even if the price rises, showing their decreased sensitivity to price changes.

• Demand elasticity varies for luxury and necessity goods.
• A steeper demand curve indicates less sensitivity to price (inelastic demand).
• As goods become necessities, their demand curves typically become steeper.

Luxury and Necessity Goods

Luxury goods are products and services that are not essential but contribute to an individual's well-being, while necessity goods are those that are essential and required for survival. Income elasticity of demand greatly differs between these two types of goods.

As consumer incomes increase, spendings on luxury goods rise more than proportionately because such products are often seen as status symbols or enjoyable extras. On the contrary, necessity goods tend to see a smaller proportional increase in demand with higher incomes as they are already basic requirements.

• Luxury goods have high income elasticity of demand.
• Necessity goods have low income elasticity of demand.
• The categorization of goods can change over time due to societal changes.

Economic Development and Consumption Patterns

Economic development influences consumer spending behavior and the product types that households allocate their income towards. In less economically developed countries, there is a higher proportion of income spent on goods that support production and self-sufficiency, such as sewing machines.

This is because individuals in less developed economies often rely more on their own capacity to produce essentials rather than purchasing them. As economies develop and incomes rise, the pattern shifts towards spending on goods and services that are more about convenience and luxury, reflecting the changing income elasticity of demand with economic progress.

• Consumption patterns shift with economic development.
• In developing countries, more income is spent on goods for self-production.
• Developed economies tend to spend more on convenience and luxury items.