Reference no: EM131880396

Now that we have covered the concepts of changes in quantity demanded and supplied, elasticity is a concept that measures by how much does quantity supplied/demand change when price changes. 

For example, a large corporation such as McDonald's has the kind of money to employ economists who study their data and trends and make predictions to executive management. If the price of a large fries costs $1.89, they forecast that the quantity demanded is 100 million orders per year in the United States (not counting international). If they raise the price by 15% (28 cents), they know the quantity demanded will decrease 8%. Thus, the elasticity calculation is:

-0.08 / 0.15 = -0.53 is interpreted as: If price of a large french fry increases by 1%, quantity demanded decreases by 0.53%. 

Therefore, if a large fries is raised 1%, from $1.89 to to $1.91, the quantity demanded will decrease by 0.53%, or from 100 million orders per year to 99.47 million orders per year. It is the economists and executives' job to figure out whether these results are good or bad for the company, and to act accordingly solely to maximize profits. 

1. Pick three products/goods where you think each has a Price Elasticity of Demand of equal to 1, greater than 1, and less than 1, and explain why you feel they are unit elastic, elastic, and inelastic.  
2. By this logic, see if you can briefly summarize the Price Elasticity of Supply. It is the mirror image of Price Elasticity of Demand, and I would like to see how you can apply your knowledge of one to the other. Use an example if you can.