Microeconomics Elasticity of Demand

Question: Discuss about the Microeconomics for Elasticity of Demand. Answer: Introduction: The present essay seeks to analyze the elasticity of demand in the context of real life scenario. Elasticity of demand depicts that the change in quantity demanded for a certain good due to change in other demand influencing factors. Elasticity of demand is categorized as own price elasticity of demand, income elasticity and cross price elasticity of demand. Price elasticity of demand explains the changes in quantity demanded due to any proportionate change in price of that product. Income elasticity of demand depicts the change in quantity demanded for 1% change in income of the individual (Barbier, Czajkowski Hanley, 2016). As stated by Baumol Blinder (2015), if change in quantity demanded is more than the change in price, the good is called elastic good. The essay applied this theory to the housing price fluctuation in Calgary, Canada and the change in car purchase trend among the young people reviewing two different articles. The first article reviews the housing price fluctuation across US cities. This paper highlights several factors affecting the housing price fluctuation in these cities. Head, Lloyd-Ellis Sun (2014) described the impact of change in per capital income on the change in housing prices. This paper has studied that income elasticity for the housing prices in US cities are greater than 1 as housing price moved more rapidly than changes in income level. This scenario implies that any shock in income or increase in come, increases value of living of people in the city. Household increases search activities with the improvement in standard of living. As per findings of the research, ratio of buyer to seller increase in the economy. It implies that demand increases more than proportionately compared to supply due to increase in search activities. Increase in demand put pressure on the housing prices rapidly as the rising price reflects the resale value of the house by home owner in future per iod. As a result value increases rapidly with the increase in transaction price. Hence, it can be concluded by reviewing the paper that income elasticity of demand for the selected US houses is greater than one. Calgary in Canada faced drop in housing price rapidly, due to weak labor market condition and overbuilding of housing. Due to weak labor market, income of people has not risen significantly and hence, demand has not been changed much (cbc.ca, 2016). Therefore, fall in demand for housing in the market is due to low increase in income. Income elasticity of demand in the real estate market of Calgary during 2015-16 is low. The second paper reviews the car purchase behavior among the young population as an application of elasticity of demand. Belgiawan et al. (2014), found that the car purchasing behavior is different among students between developed and developing countries. Students of developed countries are less desired to purchase a car as per the study. Car purchase intention varies across countries. The study does not find any correlation between the change in demand for car purchase and the change in income level. Rather the study has found positive correlation between future independence and the intention to buy a car in the future. Change in income thus has been found to have no influence on the change in demand in car. Main driving factor in this respect is change in expectation for future independence. Young consumer behavior for car purchase is hence is not significantly influenced by the change in income level and change in price of the product. A psychological factor works more to determine the demand for the product. They view car as a necessary goods, which can meet their satisfaction at different point of tile of life. Hence, it can be stated that income elasticity of demand is very low to influence changing demand for car among young population. Elasticity of demand theory and its application has been presented through above analysis showing that the application of the theory in two different context. Among the three types of elasticity, income elasticity of demand has been applied into two contexts. The first reviewed paper has been used to apply this theory on the housing market. It has been seen that demand for housing changes in the US cities more than proportionately than changes in income. Income elasticity in these cities is very high. A small change in the income level induces housing demand to change more than proportionately. On the other hand, the income elasticity in the housing market of Calgary is low due to labor market inefficiency and sluggish change in income. The second example shows that change in car demand among young people is not influenced by the change in either income or price level. References Barbier, E. B., Czajkowski, M., Hanley, N. (2016). Is the income elasticity of the willingness to pay for pollution control constant?.Environmental and Resource Economics, 1-20. Baumol, W. J., Blinder, A. S. (2015).Microeconomics: Principles and policy. Cengage Learning. Belgiawan, P. F., Schmcker, J. D., Abou-Zeid, M., Walker, J., Lee, T. C., Ettema, D. F., Fujii, S. (2014). Car ownership motivations among undergraduate students in China, Indonesia, Japan, Lebanon, Netherlands, Taiwan, and USA.Transportation,41(6), 1227-1244. cbc.ca (2016). Calgary housing market red flagged again in latest CMHC report. Retrieved 5 April 2017, from https://www.cbc.ca/news/canada/calgary/cmhc-red-flag-fall-housing-assessment-calgary-1.3822560 Head, A., Lloyd-Ellis, H., Sun, H. (2014). Search, liquidity, and the dynamics of house prices and construction.The American Economic Review,104(4), 1172-1210.