Price Elasticity Of Demand Absolute And Comparative Advantage

Question: Discuss About The Demand Absolute And Comparative Advantage? Answer: Introduction Pricing decision making is influenced by many factors of which some producers are ignorant of. Producers in most cases are the price makers except on the competitive markets. However, despite owing the power to decide the price level, it is a hard task for the producers. The reason for this is that they dont understand the concept of Price Elasticity of Demand (PED). According to Graham (2017), it explains the changes observed on demand when price is varied. Analysis Demand could either be price elastic or inelastic as shown in the following figures. Fig: Elastic Demand When demand is price elastic, a unit price change causes demand for the good to fall considerably. Thus the producer may end up raising lower revenue at the higher price than when the price was lower. It is not a good idea to raise price when the demand for a good is price elastic. Fig: Inelastic Demand When the demand for a good is inelastic to price changes, a price change by a unit has no significant influence on the quantity demanded. Although there is a fall in demand, the fall is too small such that the producer will raise more revenue selling at higher price level. It is thus a good opportunity for a producer to raise the price for a good that has an inelastic demand (Gillespie, 2013). Most of the times the producers may think that raising the prices of their products may increase their revenue. However, from this analysis we can conclude that this is not always the case. Sometimes revenues may fall even when selling at a higher price. Producers should thus be cautious about the PED for their products before they vary their prices. Economies or investors have different resource and thus have different means of production or doing other activities. Whereas others are fast, others are slow in doing the same task. Since time and resources are limited, it is not possible for any given country or investor to produce all the goods it requires. Thus it produces more of those it is more efficient in producing and exchanging with that which it doesnt produce (Tucker, 2017). Absolute advantage is different from comparative advantage in that for absolute advantage, the one who possess it is that who produces more efficiently (Pettinger, 2012). For comparative advantage, the one who possess it is that who the lowest opportunity has cost. Thus the major difference between absolute advantage and comparative is that of efficiency and opportunity cost. The following scenario clearly explains the difference between the two. Ken take 8 hours to complete a mathematic assignment and 4 hours for a statistics assignment. On the other hand, David takes 10 hours to complete a mathematic assignment and 2 hours for a statistics assignment. David has absolute advantage in mathematics assignments as he spends less hours, and David has an absolute advantage in statistics. The opportunity cost of ken doing a mathematics assignment is 8/4 = 2 statistics assignment. The opportunity cost of David doing a mathematics assignment is 10/2 = 5 statistics assignment. Ken has a compa rative advantage in doing mathematics assignment since his opportunity cost is lower. Conclusion Comparative advantage helps in specialization; since Ken has a comparative advantage in mathematics assignment he should specialize in doing mathematics assignment. David should specialize in statistics assignment. In most cases, there will be an advantage if parties specialize in what they have comparative advantage on the carry an exchange. References Gillespie, A. (2013). Business economics (2nd Ed.). Oxford, United Kingdom: Oxford University Press. Graham, R. (2017). How to Determine the Price Elasticity of Demand. Dummies. Retrieved 2 August 2017, from https://www.dummies.com/education/economics/how-to-determine-the-price-elasticity-of-demand/ Pettinger, T. (2012). Absolute Advantage. Economicshelp.org. Retrieved 2 August 2017, from https://www.economicshelp.org/blog/glossary/absolute-advantage/. Tucker, B. (2017). Economics for today (9th Ed.). Australia: Cengage Learning.