Business Economics: Price Elasticity of Demand and Trade Analysis

This business economics assignment explores two key concepts: price elasticity of demand and international trade. The assignment begins by defining price elasticity of demand, explaining its significance in microeconomics, and detailing different types of elasticity (elastic, inelastic, unitary, and perfectly inelastic). It then applies these concepts by discussing how firms, like Apple, can use elasticity to make pricing decisions. The second part of the assignment covers absolute and comparative advantage, key drivers behind international trade. It defines absolute advantage, focusing on labor productivity, and then explains comparative advantage using the concept of opportunity cost. The assignment provides a clear example illustrating how countries specialize in production and engage in trade based on comparative advantages. The assignment concludes with references to relevant academic sources.

Running head: BUSINESS ECONOMICS
BUSINESS ECONOMICS
Name of Student:
Name of University:
Author Note:

1BUSINESS ECONOMICS
TABLE OF CONTENT
ANSWER-1:....................................................................................................................................2
PRICE ELASTICITY OF DEMAND:........................................................................................2
ANSWER-2:....................................................................................................................................3
ABSOLUTE & COMPARATIVE ADVANTAGE:...................................................................3
REFERENCE:.................................................................................................................................4

2BUSINESS ECONOMICS
ANSWER-1:
PRICE ELASTICITY OF DEMAND:
Price elasticity of demand is a mechanism of microeconomics to capture consumer’s
degree of responsiveness to changes in price. As per the law of demand, fall in price boosts the
demand and increase in price reduces the quantity demanded. The lower the price, greater is the
purchasing power of consumers out of a given income. Elasticity reflects the direction and
intensity of changes in quantity demanded for one unit change in price (Fisher & Shell, 2014).
Elasticity contains negative sign for negative relation between price and demand with exception
in cases like Giffen goods that reflects positive relation between price and quantity. Elasticity is
defined as:
Ed = % change∈quantiy demanded
% change∈ price
Types of elasticity depend upon value of E. E<1 implies for unit change in price there would be
less than one unit change in demand. This is inelastic demand. E=0, implies perfectly inelastic
demand that refers to percentage change in quantity demanded is zero for one unit increase in
price. For E=1, indicates unitary elastic demand where the quantity demand rises just by 1 unit
for unit fall in price Elastic demand denoted by E>1 implies change in quantity demand by more
than one unit for unit change in price (Hall & Lieberman, 2012).
If a firm say Apple wants to raise its product price it must know how inelastic or elastic the
demand would be in favor or against of the price change. Generally, high priced apple gadgets
fall in luxurious good category that faces elastic demand. So increase in price would reduce
quantity substantially, which won’t be good for the profit of company.

3BUSINESS ECONOMICS
ANSWER-2:
ABSOLUTE & COMPARATIVE ADVANTAGE:
Driving concept behind international trade is absolute advantage. This refers to advantage
nation has in domestic production in terms of labor capability. Labor is the only input in
production under the concept. Lesser the amount of labor required to produce one unit of goods,
higher is the productivity and greater is the advantage the nation tend to have. This cross-country
difference in productivity of labor, nations follow production in one sector that is more
advantageous to produce and lead toward specialization (Levchenko & Zhang, 2016).
Specialization propels trade that further pushes exchanging for goods and services produced by
other nation with the own production.
The concept of comparative advantage revolves around the theory of opportunity cost.
This refers to the amount of foregone production in one sector for one unit production in another
sector (Laursen, 2015). Suppose in country A, to produce one unit of food, 2 unit of machine
production has to be forgiven and to produce one unit of machine goods, 0.5 unit of food
production. In country B, , to produce one unit of food, 1.5 unit of machine production has to be
forgiven and one unit of machine production requires 2.5 unit of food production to be forgive.
Evidently, machine production requires less sacrifice of food in Country A and Country B has
lesser opportunity cost in food production indicating A would specialize in machine production
and B in food production and they exchange through trade.

4BUSINESS ECONOMICS
REFERENCE:
Fisher, F. M., & Shell, K. (2014). The Economic Theory of Price Indices: Two Essays on the
Effects of Taste, Quality, and Technological Change. Academic Press.
Hall, R. E., & Lieberman, M. (2012). Microeconomics: Principles and applications. Cengage
Learning.
Laursen, K. (2015). Revealed comparative advantage and the alternatives as measures of
international specialization. Eurasian Business Review, 5(1), 99-115.
Levchenko, A. A., & Zhang, J. (2016). The evolution of comparative advantage: Measurement
and welfare implications. Journal of Monetary Economics, 78, 96-111.