Business Economics Essay Example | Topics and Well Written Essays - 1250 words - 1

Business Economics - Essay Example Demand elasticity varies with necessities versus luxuries. Since necessities are important they tend to be inelastic, which means even though prices change by much the quantity demanded does not change by much because of the said reason (Mankiw). If water prices suddenly increased, we do not expect consumption of water to plummet sharply. On the other hand, luxuries tend to be elastic. If for example the price of yacht suddenly increased, the affluent can opt for other hobbies causing a much decline in the quantity of yacht demanded. The availability of close substitutes also affects the elasticity of demand. Specifically, commodities with available close substitutes such as butter are observed to have an elastic demand (Mankiw). It can easily be replaced by margarine; therefore demand for such product will decline by a great magnitude. On the other hand, since egg has no close substitute demand for such is inelastic. Lastly, time horizon also constitutes a factor in the price elasticity of demand. â€Å"Goods tend to have more elastic demand over long time horizons† (Mankiw). This is explained by the fact that longer time horizon gives consumers more flexibility to alter their consumption pattern such that goods whose price are increased or are relatively higher can be replaced. Wage is one of the costs in production. Depending on the type of industry, wage can be a huge part of the total cost. In the insurance industry for example, where the cost of sales people and managers are paid through wages, wage increase can represent a huge boost of the total cost. Since wage is considered a variable cost, an increase in wage constitutes an increase int he variable cost. With fixed amount of production or quantity, an increase in wage also increases the average variable cost. Also, since an additional payment in wage is an increase in the extra cost for every output produced, by definition marginal cost also