Econpric Essay, Research Paper

Economics Essay> Q. Why do prices of some goods fluctuate more than others?A. It is a well known fact, that various prices of goodsfluctuate at various levels. The products which fluctuate most inprice are often held to be necessities, but what is that makesthese changes, and which factors influence them. Before trying to conclude which goods fluctuate most price-wise and why, it seems sensible to ask which group these productsbelong. As mentioned necessities are known to be inelastic, but soare a lot of products with no close substitutes like for examplemotor cars, petrol, tobacco and alcoholic drinks. Now what do thesegoods have in common, one might ask. Well, for starters they allhave a very inelastic demand. In these situations we get the graphas the one below (1.A). From 1.A it is obvious that if quantity by

some reason decreases from Q1 to Q2 this gives a quite highincrease in price from P1 to P2. From this it can be concluded thata small change in quantity of a product which has low elasticity,results in high changes in price, i.e. a lot of price fluctuations. On the other hand we have products who’s prices rarelyfluctuate as for example luxuries. Here again it is obvious that achange in quantity demanded will result in only a little change inprice. This is displayed in the graph 1.B below. Here we can seethat quantity changes from Q1 to Q2 resulting on the change P1 toP2, which here concludes that the products like luxuries havehighly elastic demand, resulting in only small price fluctuations. From the above I can conclude that the reason why some goodsfluctuate more price wise than others is due to the elasticity ofthe examined good.