ESSAY 4

a) Explain, with examples, the significance of a value of a good's cross-elasticity of demand in relation to its substitutes and complements. 

Cross-elasticity of demand (XED) measures the responsiveness in quantity demanded of a good as a result of a change in the price of its related goods. The value of XED may be positive or negative and the sign is important since it tells us what the relationship between the two goods in question is. 

Substitute goods are the ones with positive value of XED. When the price of product X falls, demand for product X increases causing the demand of its substitute, Y, to decrease. There is a decrease in quantity demanded for good Y and an increase in quantity demanded for good X therefore a positive XED value is produced. For example, Iphone and Samsung. Assuming they are a close substitute. It will produce a higher positive value than products that are not so close. If the price of Iphone increases, consumers will switch over to Samsung causing the sales to increase. 

Complement goods have a negative value of XED. When the price of good A falls, the demand for good A increases and its complement, good B will also increase. There is an increase in good B and a decrease in the price of good A thus a negative XED value is produced. For example, mobile phones and sim cards. Assuming they are a close complement. It will produce a lower negative value than products that are not so close. An increase in prices of mobile phones may lead to a significant fall of quantity demanded of it and so a large fall in the demand for sim cards. 

b) Discuss the usefulness to businesses of a knowledge of price elasticity of demand and income elasticity of demand.

Price elasticity of demand (PED) measures the responsiveness of the quantity demanded of a good to a change in its price. PED is useful to a business because businessmen will be able to know whether they should increase or decrease their prices for a good so that they will gain profits and earn more revenue. 

For example, if the product is and elastic good, businessmen can decrease the price of the good because a small decrease in price will lead to a big increase in quantity demanded. The total revenue will increase. Businessmen should not increase the price of an elastic good  because it will result in a big decrease in quantity demanded and total revenue will also decrease.

If the product is an inelastic good, businessmen can increase the price of a good because an increase in price causes a small decrease in quantity demanded and therefore total revenue increases. Businessmen should not decrease the price of an inelastic good because it only affects a small increase in quantity demanded and therefore a decrease in total revenue

Income elasticity of demand (YED) measures the responsiveness of the demand for a good to a change in income. During an economy boom period, people tend to buy more as they can afford more of it. This applies to normal goods such as cars. Firms producing normal goods will tend to increase their production. 

For some goods, during an economy boom, when price increases, there is a decrease in quantity demanded because people can afford better. People start switching from inferior goods that they had been using to superior goods. For example, people who always carry inexpensive bags will tend to change to using branded handbags when income increases. Firms producing inexpensive handbags during an economy boom period should cut down on their production while firms producing branded handbags should increase production. 

During an economy downturn, people will give up on luxury goods such as the branded handbags and carry inexpensive handbags. This time, firms producing branded handbags should cut down on production while firms producing inexpensive handbags increases their production.

PROJECT

So i guess this will be my first ever project to be done in high school. So basically our main aim on doing this project is to learn more about the theory of demand. We have been told by our economics teacher to do a research on a housing development project on the factors affecting demand and factors affecting supply of that particular housing project. We then have to calculate the ped, yed and xed of the project and lastly make an evaluation. 

After being told what we were suppose to do for our projects, many thoughts came running through my mind. I mean its definitely our first time working together. Will it turn out well? Were we able to complete them in time? It's the night before our presentation, I'm glad to say that we're almost done with the project. 

Everyone has their different criteria when deciding to buy a house. Either its within area with  easy access to the public transportation (Lrt, bus stop), single storey house?, double storey house? We call all those factors affecting demand. There are many other factors evolving when buying a house. One of the most important factor is the price. Factor of affordability. We did a survey surveying buyers on what they think is most important when buying a house. Majority chose factor of affordability being most important. What's the point if he/she sees her dream house but can't afford it. They will have to settle for another house that is within their budget. The availability of loans are one of the factors as well which is also the complement to the housing project. 

After getting to know on factors affecting demand of a housing project, we now talk about factors affecting supply. I always had this simple mindset that it is easy to start a new housing project. Architects designing the plan, contractors start building and taaa-daa, a brand new house ready to be sold. Guess i was wrong. There are so many things to be done before getting a property built. An important factor would be the customers preference. If this factor was unknown and when the property has been without meeting the customers preference suppliers will face a hard time selling them.

There are so many properties being built. Land, labour, capitals. All these are important resources that we need before being able to build a house. Developers have to know the price range for the houses, whether they would like to build a middle priced housing project or a lower priced housing project. This is important so that developers does not exceed the limit for their cost of production. 

Our housing project,  Kingsley Hills is a luxury good which is an elastic good. Developers should decrease the price of the houses so that more customers will buy it. However, in the real world, developers would not decrease the prices simply because they will suffer a loss as the cost of production has been high. 

I can say that I've absorb some knowledge throughout this project. It made me understand better on this chapter regarding theory of demand. Carrying out this project together with my classmates made things easier to understand and of course, learning became funner. Oh yes, and from now on, at least I'll know how troublesome and all the many decisions i will be making when buying my own house in the future =p