Business Economics Homework: Elasticity, Advantage, and Trade

This business economics assignment delves into two core economic concepts: price elasticity of demand and the theories of absolute and comparative advantage. The assignment begins by defining and explaining price elasticity, including its different types (elastic, inelastic, and perfectly inelastic) and how businesses can use it in their strategic planning, particularly when launching products at different price points. The second part of the assignment explores the principles of absolute and comparative advantage within the context of international trade. It uses a labor requirement table to illustrate how countries can specialize in production based on their efficiency and lower opportunity costs. The assignment emphasizes how specialization and trade can create value for all participating nations, leading to more efficient resource allocation and increased overall economic output. The assignment also includes the references used for the solution.

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

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TABLE OF CONTENT
ANSWER-1:....................................................................................................................................2
Price elasticity of demand:...........................................................................................................2
ANSWER-2:....................................................................................................................................3
Absolute & comparative advantage:............................................................................................3
Reference:........................................................................................................................................4

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ANSWER-1:
Price elasticity of demand:
Price elasticity of demand captures degree of responsiveness of the consumers in terms of
quantity demanded. It makes reflection of the intensity and direction regarding the change sin
demand for unit change in price. Elasticity helps to capture the direction as well as intensity of
variation in quantity demanded for one unit rise or fall in price. It is defined as:
Ed = % change∈quantiy demanded
% change∈ price

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P
Q
P
Q
E=∞: Perfect
Elasticity
E=0: Perfect
Inelasticity
Perfect inelasticity and elasticity of demand are two extreme cases of captured by E=0 and E=∞
Based on the values of E, types of elasticity can be explained. For E<1, it explains that one unit
change in price there would cause than one unit change in demand (Rios, McConnell & Brue,
2013). This is called price inelasticity of demand. E=0, implies perfectly inelastic. E>1 refers to

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elastic demand referring to more than unit change in demand for one unit change in price (Hall &
Lieberman, 2012).
Suppose Nokia wants to launch a new phone with higher price than before then the
elasticity of demand needs to be incorporated by the firm in his strategy planning. Generally,
high priced gadgets fall in luxurious good category capturing elastic demand that reduces
demanded quantity substantially for increase in price. This is not good for the profit incentive of
the business.
ANSWER-2:
Absolute & comparative advantage:
It is one of the leading concepts underlying the international trade among nations. A
nation is defined to have absolute advantage if it has lower labor requirement in per unit
production. This further reflects the labor productivity applied in production. Labor being the
only input in production, higher productive labor consolidates the absolute advantage of the
nation compelling it to specialize in line of production with the goods that yields more output per
unit of labor (Feenstra, 2015).
Labor hour per unit of production
Country Food Wine
A 20 30

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Wine
Food
30
Country B
Country A
40
15
20
B 40 15
Figure 1: Absolute Advantage
Country A seems to require lesser unit of labor in production of food and Country B has little
labor requirement in production wine. The doctrine of absolute advantage would suggest A to
produce food and trade it for wine with B.
Figure 2: Graph Showing Absolute Advantage
In the theory of international trade economics concept of comparative advantage indicates the
ability a nation has to produce a good comparatively at lower opportunity cost as well marginal
cost. Opportunity cost is the driving factor behind the concept of comparative advantage and
refers to the amount of some production to be undergone in order to conduct production in one
particular sector (Laursen, 2015). This consolidates how trade is beneficial for both the nation

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creating value and allowing nation to produce the good that has lower opportunity cost and fewer
use of resources.
Opportunity Cost of per unit production
Country Food Wine
A = 2/3 unit of wine (<1) = 3/2 unit of food (>1)
B = 8/3 unit if wine (> 1) 3/8 unit of food (<1)
Figure 3; Opportunity Cost & Comparative Advantages
Based on the labor requirement of per unit production stated in table 1Country A has lower
opportunity cost of food production in terms of foregone wine compared to wine production in
terms of food production in which B has comparative advantage. Hence All specialize in food
production and Bi in wine production and they will trade with one another the goods in order to
create value and benefit out of it.

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Reference:
Feenstra, R. C. (2015). Advanced international trade: theory and evidence. Princeton university
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.
Rios, M. C., McConnell, C. R., & Brue, S. L. (2013). Economics: Principles, problems, and
policies. McGraw-Hill.