Portion 1
The law of demand states that a fall in the price of a product raises the quantity
demanded for the product, whereas an increase in price leads to a decrease in
quantity demanded for the product. The price elasticity of demand measures the
extent of the responsiveness of the quantity demanded to a change in price. Demand
for a product is elastic if the quantity demanded responds substantially to changes in
the price, and the percentage change in quantity demanded is greater than the
percentage change in price. Demand is inelastic if the quantity demanded responds
only slightly to changes in the price, which indicates that the percentage in price is
greater than the percentage in quantity demanded for a certain product.
However, the extent of responsiveness of quantity demanded to a change in price
depends on the nature of a particular good or service in the market. The price
elasticity of demand partly depends on the availability of close substitutes. When a
large number of substitutes are available, consumers respond to a higher price of a
product by buying more of the substitute the product and less of the relatively more
expensive product. In addition, goods or services that are considered necessities
tend to have less elastic (more inelastic) demand, whereas goods or services that are
considered luxuries have more elastic (less inelastic) demand.
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Explain why the demand for the good or service provided by a firm is elastic or
inelastic. How does the elastic or inelastic demand influence pricing decisions
by the firm to maximize profit? What are the impacts of elastic demand and
inelastic demand on total revenue?
Provide examples on how the availability of close substitutes affects price
elasticity of demand for a good or service.
Give specific examples of necessities or luxuries and explain how they affect
price elasticity of goods or services.
*****350 WORDS RESPONSE MINIMUM WITH
REFERENCES LISTED*****
Portion 2
The role of a government in the market economy is one of the most debated issues in
economics. Similarly, one of the most enduring debates on U.S. economic history
focuses on the role of government in the economy. Some argue that government
regulation of the U.S. economy is too little and too late. On the other hand, there is
also a claim that the U.S. economy is no longer a free market due to too many
regulations.
Investigate Government Failure and the use of special-interest lobbyists with its
connection with the government failures. The process of lobbying legislatures is itself
becoming a big business. State legislatures are under the same kind of pressure from
interest groups as the Senate and the House of Representatives.
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What are the roles of government in the market economy? Based on the
current economic conditions, to what extent should the government intervene
in the market economy?
What are the justifications given in favor of more government involvement in
the market economy? What are the reasons given in favor of less government
involvement in the market economy?
Provide an example to discuss how special interests can succeed in
perpetuating policies that are opposed by the majority of voters because the
costs of organizing and motivating groups to take political action increase with
group’s size.
*****350 WORDS RESPONSE MINIMUM WITH
REFERENCES LISTED*****

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