Business Economics: Elasticity & Trade

This business economics assignment explores two key concepts: price elasticity of demand and international trade theories. It examines how firms utilize price elasticity in pricing strategies, particularly through price discrimination. Additionally, it analyzes the theories of Absolute Advantage and Comparative Advantage in international trade, providing examples and discussing their limitations. The assignment includes clear introductions, analyses, and conclusions for each concept.

Running head: BUSINESS ECONOMICS
Business Economics
Name of the Student
Name of the University
Author Note

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Table of Contents
Answer 1:.........................................................................................................................................2
Introduction..................................................................................................................................2
Analysis.......................................................................................................................................2
Conclusion...................................................................................................................................3
Answer 2:.........................................................................................................................................3
Introduction..................................................................................................................................3
Analysis.......................................................................................................................................4
Conclusion...................................................................................................................................4
References........................................................................................................................................6

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Answer 1:
Introduction
One of the primary economic concepts, which are used by the firms in their pricing and
production decisions, is the concept of price elasticity of demand. The price elasticity of demand
shows the percentage change in the demand of a commodity or service due to one percent
alteration in the price of the same.
Analysis
The price elasticity of demand, in general, is a measure of the degree of responsiveness of
the demand of a commodity. It shows how much the consumer changes their demand in response
to the change in the prices of the same. Price elasticity can be of two types, own price elasticity
and cross price elasticity as the demand for a commodity not only depends on the price of the
commodity itself but also on the price of the related commodities, which include complements
and substitutes (Ekelund Jr & Hébert, 2013).
The above-discussed aspect of price elasticity of demand is used by the firms to decide
the pricing strategies, which can be explained with the phenomenon of price discrimination in
the markets. The economic phenomenon of price discrimination is the pricing strategy, mainly
occurring in the monopoly market, in which the sellers charge different prices for the same
commodity in different markets, depending on the differences in demand for the commodity in
the markets, which are usually geographically distant from each other (Varian, 2014).

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Figure 1: Price Discrimination
(Source: As created by the Author)
As can be seen from the above diagram , the demand elasticity being different in different
markets, the producers can charge higher prices in these markets where the demand is more
inelastic, thereby increasing their profit.
Conclusion
Price elasticity of demand is one of the primary decisive factors of the firms to make their
production and pricing strategies as can be seen from the above discussion. Proper utilization of
the concerned concept can help the firms to increase their revenue levels.
Answer 2:
Introduction
The international theories have evolved over the years and at par the dynamics in the
international commercial scenario and the changes in the same, with the commercial world being
more integrated post Globalization. In this context two of the primary trade theories, which have

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been into existence for decades are the theory of Absolute Advantage and the theory of
Comparative Advantage.
Analysis
Adam Smith first proposed the Absolute Advantage theory in international trade.
According to this theory, the countries should produce and export only those goods and services,
in which they have absolute advantage in production that is they should produce those
commodities, the production of which uses the resources more efficiently.
However, in many cases it may so happen that between the two trading partner countries,
one country enjoys absolute advantage in all the commodities over the other one. In such cases,
the theory of Comparative Advantage fills up the gap of the former trade theory. The
Comparative Advantage theory, proposed by David Ricardo states that the countries should
produce and export those commodities in the production of which the opportunity cost of the
same is lesser than the other countries (Johns, 2013).
However, there are several countries, which in spite of having comparative advantages in
some sectors do not use them. China, for example, has immense comparative advantage in labour
intensive commodities. However, it does not utilize the same and exports capital intensive
commodities, which may be to prevent the rising of wages in the labor market (Nunn &Trefler,
2013).
Conclusion
As can be seen from the above discussion, the theory of comparative advantage is one of
the most integrating and inclusive trade theories, which also seems feasible. However, several

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countries, in spite of having comparative advantages, do not utilize the comparative advantages
in several situations.

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References
Ekelund Jr, R. B., & Hébert, R. F. (2013). A history of economic theory and method. Waveland
Press.
Johns, R. A. (2013). International trade theories and the evolving international economy.
Bloomsbury Publishing.
Nunn, N., &Trefler, D. (2013). Domestic institutions as a source of comparative advantage (No.
w18851). National Bureau of Economic Research.
Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach: Ninth International
Student Edition. WW Norton & Company